Gian Quezia Lynn E.

Garcia
Section 2

IFRS 3 – Quiz

Question 1.1
The transaction constitutes a business combination under IFRS 3 because the acquiree
(TCF) is considered a business.

Question 1.2
The acquisition is still considered a business combination because similar to Q1.1 the
acquirer acquired the equity of the acquiree and the acquiree still constitutes a business.

Question 1.3
The acquisition shall not constitute a business combination under IFRS 3 because such
standard does not apply to the combination of businesses under common control.

Question 1.4
Yes. A business combination may occur even without the transfer of consideration
between entities if there is a contractual agreement between them to combine their
businesses.

Question 2.1
The adjudged acquirer is XBY because according to IFRS 3, between two combining
entities where the combination is affected by the exchange of equity interests, the
acquirer is usually the one the issues its equity interests. At the same time, the owners of
XBY retained a larger portion of the voting rights of the combined entity compared to the
40% voting rights received by the TCF. Lastly, XBY dominates the management of the
combined entity by getting 4 out of the 6 positions for directors.

Question 2.2
Since a new company was formed to issue equity interest for the purpose of effecting the
business combination between XBY and TCF, then one of the combining entities that
existed prior to the combination shall be considered as the acquirer. In this case, it is
either XBY or TCF. According to the agreement, all 4 of the existing directors of XBY
and 2 of the existing directors of TCF shall take up the board positions of NewCo.
Because XBY will have majority of the board positions, it shall be considered as the
adjudged acquirer.

Question 2.3
XBY is considered as the acquirer since between the two combining entities, it is
relatively bigger in size and the combination would result to XBY dominating the board
of directors in the combined entity.

Question 3.1
May 1, 20x9. This is the date when the consideration was transferred.
Question 3.2
April 1, 20x9. There is an agreement between the combining entities that control shall
pass on the date of agreement.

Question 3.3
March 1, 20x9. There is an agreement between the combining entities that the acquisition
date is on March 1, 20x9.

Question 3.4
July 1, 20x9. This is the date when the regulatory body approved of the business
combination.

Question 4
Item Decision and Amount
Customer Contracts Recognize at P15 million because it arises from a
contractual right.
Non-contractual Customer Do not recognize because it cannot be measured reliably.
Relationships
Internet Domain Names Recognize at P2 million because it arises from a business
combination and not internally generated.
Brand Name Recognize at P20 million because it arises from a
business combination and not internally generated.
Customer Database Recognize at P1 million because it arises from a business
combination and not internally generated.
In-process R&D Recognize at P1 million because it arises from a business
combination and not internally generated.
Lease Agreement Recognize at P3 million as liability because the lease
terms are unfavorable compared with market terms.
Website Contract Recognize at P2 million.
Claim for Damages Recognize at P2 million because it qualifies for
recognition as liability.
Question 5
TCF
Statement of Financial Position
May 1, 20x9

Book Value Fair Value

ASSETS
Cash 10 10
Debtors, net 20 20
Mortgage Loan Receivables 55 47
PPE 30 35
Intangibles – Software 2 2
Intangibles – Customer Contracts - 15
Intangibles – Internet Domain Names - 2
Intangibles – Brand Name - 20
Intangibles – Customer Database - 1
Intangibles – In-process R&D - 1
Intangibles – Website Contract - 2
Total Assets 117 155

LIABILITIES
Deferred Tax - 7
Payables 30 30
Provisions 10 10
Interest-bearing Liabilities 10 15
Lease Agreement - 3
Contingent Liabilities - . 2 .
Total Liabilities 50 67
NET ASSETS 67 88
Total Liabilities and Net Assets 117 155

Question 6
Fair Value Tax Base Temporary Difference
Asset Liability
Mortgage Loan Receivables 47 55 8
PPE 35 20 15
Provisions (10) - 10
Intangibles 41 - 36
Interest-bearing Liabilities (15) (10) 5
Lease Agreement (3) - 3
Contingent Liabilities (2) - 2
Total Temporary Difference 28 51

Deferred Tax Liability = 51 – 28 = 23 x 30% = 6.9 ≈ 7

Question 7.1
The consideration is the issuance of 10 million shares plus the directly attributable costs.

Question 7.2
The consideration will increase by P4 million which shall be considered as a contingent
consideration and appropriate adjustments shall be made to increase the goodwill
acquired from the business combination.

Question 7.3
This subsequent information shall not affect the initial/provisional accounting of the
business combination, thus, no adjustment to the goodwill or gain on bargain purchase
shall be made because the event happened beyond the measurement period of one year.
The contingent consideration shall be derecognized and a gain on contingent
consideration payable shall be recognized by the entity.

Question 7.4
The P400,000 fair value shall not be considered as a contingent consideration. Rather, it
shall be considered as a compensation expense which shall be recognized during the
period it is incurred.

Question 7.5
The payment of P200,000 to owner E shall be considered as additional consideration
since owner E will not remain employed in the acquiree company.

Question 8.1
If the total consideration paid is greater than the fair value of the net identifiable assets of
the acquiree company, the acquirer shall recognize a goodwill in the consolidated
statement of financial position. Otherwise, a gain on bargain purchase shall be recognized
in the profit or loss section of the statement of comprehensive income in the period the
combination occurred.

Question 8.2
The total consideration is equal to P75 million based on the P10/share fair value of the
acquirer’s shares on the date of acquisition. On the other hand, the fair value of the
acquiree company’s net assets is equal to P88 million (P155 million – P67 million).
Therefore, a gain on bargain purchase of P13 million (P75 million – P88 million) shall be
recognized by the acquirer in its profit or loss.

Question 9.1
Such error shall be recognized prospectively and shall not affect the initial accounting of
the goodwill or gain on bargain purchase.