AF2203: L1 (Accounting for Groups at the Date of Acquisition)

IFRS3

business combinations: outlines the accounting treatment when an acquirer obtains control of a business

accounting process of IFRS3

1. identify acquisition date

2. determine the consideration transferred

3. measure net assets at FV

4. account for goodwill

net assets at FV

identifiable assets acquired - liabilities assumed

positive goodwill and accounting treatment

• investment exceeds total of the net assets acquired

• recognize as an asset w/ no amortization

  • test for impairment under IAS36 annually (more frequent when impairment indicated), goodwill IL can’t be reversed

negative goodwill (bargain purchase)

• investment is less than the FV of identifiable net assets

  • occurs when: errors measuring FV of A/L, future costs/losses accounted for/bargain purchase

• recognize as a gain in SOPL after reviewing FV to ensure no A overstating/L understating

measuring goodwill (100% vs <100% ownership)

100%: consideration - MV of net A

<100%: consideration + NCI - MV of net A

non-controlling interest

the remaining stake of the subsidiary the acquirer doesn’t own (1-x%)

2 methods of determining NCI

1. portion of FV net A: (1-x%)(FV net A)

2. FV measurement: based on quotes price in an active market for the equity shares

IFRS10

consolidated financial statements: sets requirements for determining when an entity must consolidate another and the principles for presenting/preparing consolidated financial statements

IFRS10 definition of a group

a group exists when one enterprise (parent) controls, directly/indirectly, another enterprise (subsidiary)

• group = parent + subsidiaries

IFRS10 definition of control

control exists when parent has:

1. power over subsidiary

2. exposure/rights to variable returns

3. ability to use power to affect returns

can a firm have control with <50% ownership?

yes, de facto control arises depending on:

• the size of investors’ holding of voting rights relative to the size/dispersion of other voting rights

• rights arising from other agreements

IFRS10 accounting treatment

the parent is required to present a consolidated financial statement

• exceptions: parent itself is a subsidiary/investment entity

consolidated financial statement

FS of a group in which assets, liabilities, equities, income, expenses, CFs of the parent and subsidiaries are presented as those of a single economic entity

IAS27

separate financial statements: prescribes accounting for investments in subsidiaries, joint ventures, associates in separate financial statements

IAS27 accounting treatment

in separate FS, parent reports investments in subsidiaries as assets and dividends from them in one income line