Advanced Financial Accounting: Chapter 4

Advanced Financial Accounting: Chapter 4
Group Reporting III Tan, Lim & Lee Chapter 4 © 2015

Learning Objectives Understand the rationale for elimination of investment; Understand the concept of non-controlling interests; Appreciate the alternative measurement basis for non-controlling interests under IFRS 3; Know how to prepare consolidation journal entries relating to goodwill, depreciation and amortization of differences between book values and fair values of identifiable assets, contingent liabilities of acquired subsidiaries and non-controlling interests; Know how to prepare consolidation journal entries to allocate current and past income to non-controlling interests; and Understand the components of non-controlling interests and know how to analytically determine their balances Tan, Lim & Lee Chapter 4 © 2015

Content Introduction 1. Introduction
Elimination of the investment in a subsidiary Effects of amortization, depreciation and disposal of undervalued or overvalued assets and liabilities subsequent to acquisition Accounting for non-controlling interests under IFRS 3 Goodwill impairment tests Conclusion Introduction Tan, Lim & Lee Chapter 4 © 2015

Introduction Recap of chapter 3
Acquisition method: recognize and measure identifiable net assets at fair value + recognize goodwill Recognition and measurement principles Different forms of business combination but in substance they share common features Acquirer who gains control of one or more businesses Acquisition of a subsidiary = Acquisition of net assets of the acquiree Tan, Lim & Lee Chapter 4 © 2015

Introduction Focus of chapter 4:
Subsequent effects when identifiable net assets are consumed, extinguished or amortized. Sale, consumption, use or settlement of the assets and liabilities of acquiree should be recorded at fair value Test for impairment of goodwill Subsequent effects of acquisition Demonstrate how consolidation journal entries are passed to record the subsequent effects of acquisition Accounting for non-controlling interests Show how the balance of the non-controlling interests can be analyzed with respect to three components Illustrate the consolidation journal entries to recognize non-controlling interest’s share of equity Accounting for business combinations in multiple periods Explain the re-enactment process: involving re-enacting certain past consolidation adjusting entries. Tan, Lim & Lee Chapter 4 © 2015

Content Introduction Overview of the consolidation process
Effects of amortization, depreciation and disposal of undervalued or overvalued assets and liabilities subsequent to acquisition Accounting for non-controlling interests under IFRS 3 Goodwill impairment tests Conclusion Appendix 4: Illustrations of non-controlling interests measured as a proportion of acquisition-date identifiable net assets. Elimination of the investment in a subsidiary Tan, Lim & Lee Chapter 4 © 2015

Elimination of Investment Account
What the parent is paying for 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 Investment account is eliminated To ensure that the investment account must be zero Substituted with subsidiary’s identifiable net assets and goodwill (residual) Rationale: Avoid recognizing assets in two forms (investment in parent’s statement of financial position and individual assets and liabilities of subsidiary) Tan, Lim & Lee Chapter 4 © 2015

Elimination of Investment Account
Investment account is eliminated (Continued) Pre-acquisition retained earnings or pre-acquisition reserves of subsidiary are not included in consolidated equity Rationale: Pre-acquisition retained earnings arose prior to the exercise of control by parent The elimination process will result in residuals comprising of Goodwill; and Excess or deficit of fair value over book value of identifiable net assets Re-enactment of elimination of investment entry in subsequent year Re-enacted as long as the investment exists Rationale: parent’s legal entity financial statements would include investment in subsidiary balance Tan, Lim & Lee Chapter 4 © 2015

Illustration 1: Elimination of investment
Illustration On 8 August 2010, Parent Co. bought 100% interest in subsidiary for $200,000. At the date of acquisition, Subsidiary Co had the following: Share capital: $50,000 Retained earnings: $30,000 Equity: $80,000 At acquisition date, Subsidiary Co unrecognized intangible assets had a fair value of $50,000. Tax rate was 20% Tan, Lim & Lee Chapter 4 © 2015

Parent Subsidiary Consolidation adjustments Consolidated Statement of financial position Dr Cr Assets Investment in Subsidiary 200,000 Goodwill (Note 2) 80,000 Other net assets (Note 1) 300,000 50,000 10,000 420,000 500,000 130,000 210,000 Equity Share capital 100,000 Retained earnings 400,000 30,000 Tan, Lim & Lee Chapter 4 © 2015

Illustration 1: Elimination of Investment
Note 1: Increase in other net assets due to recognition of intangible assets 50,000 Decrease in other net assets due to recognition of deferred tax liability (10,000) Net increase in other net assets 40,000 Note 2: Goodwill is excess of the investment amount over the FV of identifiable net assets Investment in Subsidiary 200,000 Book value of equity or net assets (80,000) Fair value of intangible asset Book value of intangible asset Excess of fair value over book value Deferred tax effects (40,000) Goodwill 80,000 Tan, Lim & Lee Chapter 4 © 2015

CJE1: Elimination of investment in subsidiary Dr Share capital 50,000 Retained earnings 30,000 Goodwill 80,000 Intangible asset Cr Investment in Subsidiary 200,000 Deferred tax liability 10,000 210,000 Re-enacting CJE Building blocks of consolidation worksheet are the legal entity financial statements of parent and subsidiary CJE 1 has to be re-enacted at each reporting date as long as Parent has control over subsidiary Each consolidation process is a fresh-start approach Tan, Lim & Lee Chapter 4 © 2015

Content Introduction Elimination of the investment in a subsidiary
Accounting for non-controlling interests under IFRS 3 Goodwill impairment tests Conclusion Effects of amortization, depreciation and disposal of undervalued or overvalued assets and liabilities subsequent to acquisition Tan, Lim & Lee Chapter 4 © 2015

In Subsequent Years At acquisition date, we recognize:
Fair value of identifiable net assets of acquiree as at acquisition date, Intangibles, contingent liabilities, Deferred tax assets or liabilities on the above; and Goodwill as a residual In subsequent years: Subsequent extinguishment of assets and liabilities of subsidiary must be determined based on the fair values at acquisition date. Therefore, subsequent amortization, depreciation and cost of sales of acquired assets are determined based on fair value as at acquisition date Elimination of consideration transferred , recognition of fair value adjustments and amortization entries must be repeated until: Date of disposal of the investment in subsidiary; or Date when control is lost Tan, Lim & Lee Chapter 4 © 2015

In Subsequent Years = + In subsequent years (Continued)
Acquisition method only recognizes fair value at critical event: acquisition date New internally-generated goodwill or subsequent appreciation in fair values are not recognized subsequent to 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 (FV- BV) adjustment to expense = FV of expense in consolidated financial statements BV of expense in separate financial statements + Adjusted in consolidation worksheet Tan, Lim & Lee Chapter 4 © 2015

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 Liabilities (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 Tan, Lim & Lee Chapter 4 © 2015

Additional information: Contingent liability of $100,000 was recognized as a provision loss by the acquiree in legal entity financial statement on 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 Tan, Lim & Lee Chapter 4 © 2015

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 Tan, Lim & Lee Chapter 4 © 2015

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 = $2,300,000 – 20% x $7,020,000 = $2,300,000 – $1,404,000 = $896,000 Tan, Lim & Lee Chapter 4 © 2015

Consolidation adjustments for 20X5 CJE 1: Elimination of investment in Subsidiary Dr Share capital 1,000,000 Opening retained earnings 3,700,000 Leased property In-process R&D 2,000,000 Goodwill 4,480,000 Cr Contingent liability 100,000 Deferred tax liability (net) 580,000 Investment in S 9,200,000 Non-controlling interests 2,300,000 Tan, Lim & Lee Chapter 4 © 2015

CJE 2: Depreciation and amortization of excess of FV over book value Dr Depreciation of leased property 50,000 Amortization of in-process R&D 200,000 Cr Accumulated depreciation Accumulated amortization Under dep. by $50k $ 0 Amort exp: $200,000 Amort. of R&D Based on book value Based on FV Under amort. by $200k Dep exp: $50,000 Check with prof Dep. of leased property $200,000 $250,000 Based on book value Based on FV Tan, Lim & Lee Chapter 4 © 2015

CJE 3: Reversal of entry relating to provision for loss Dr Provision for loss 100,000 Cr Loss expense Note: Contingent liability was already recognized in CJE 1. The recognition by the acquiree in its legal entity financial statement results in double counting; hence this reversal entry is necessary CJE 4: Tax effects on CJE 2 & CJE 3 Dr Deferred tax liability (net) 30,000 Cr Tax expense 20% * (200k +50k -100k) Tan, Lim & Lee Chapter 4 © 2015

CJE 5: Allocation of current year profit to non-controlling interests (NCI) Dr Income to NCI 176,000 Cr NCI Net profit after tax 1,000,000 Excess depreciation (50,000) Excess amortization (200,000) Reversal of loss from contingent liability 100,000 Tax effects on FV adjustments 30,000 Adjusted net profit 880,000 NCI’s share (20%) Tan, Lim & Lee Chapter 4 © 2015

Explanatory note to CJE 5: NCI have a share in the extinguishment of the initial FV differences and in the impairment of goodwill. Net profit after tax represents that increase in the book value of equity of the subsidiary Other adjustments relate to the extinguishment of the FV differentials NCI have a share of $176,000 of adjusted profit which represents Increase in book value Decrease in fair value differentials Tan, Lim & Lee Chapter 4 © 2015

Q2 : Perform an analytical check on the balance of NCI as at 31 Dec 20X5 1st Step: reconstruct the balance of non-controlling interest as at 31 Dec 20x5 NCI as at acquisition date (CJE 1) 2,300,000 Income allocated to NCI for 20x5 (CJE5) 176,000 NCI as at 31 December 20x5 2,476,000 Tan, Lim & Lee Chapter 4 © 2015

2nd step: reconcile the balance to the three components that NCI have - Non – controlling interests Share of book value of net assets Share of Unamortized FV adjustment 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 + + Tan, Lim & Lee Chapter 4 © 2015

Effects of amortization, depreciation and disposal of undervalued or overvalued assets and liabilities subsequent to acquisition Accounting for non-controlling interests under IFRS 3 Goodwill impairment tests Conclusion Accounting for non-controlling interest under IFRS 3 Tan, Lim & Lee Chapter 4 © 2015

Non-controlling interest
NCI only arises in consolidated financial statements where: one or more subsidiaries are not wholly owned by the parent (IFRS 10) NCI are entitled to their share of retained earnings of the subsidiary from incorporation No distinction between pre-acquisition and post-acquisition retained earnings for NCI Same applies to OCI NCI collectively have a share of accumulated OCI arising from incorporate date to the current date NCI are normally a credit balance Share of residual interests in the net assets of a subsidiary Total equity (parent’s and NCI) = Assets - Liabilities Tan, Lim & Lee Chapter 4 © 2015

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 basis” Measured as a proportion of the recognized amounts of the identifiable assets as at acquisition date Tan, Lim & Lee Chapter 4 © 2015

Under the fair value basis: 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 because of control premium paid by parent (e.g. 20% premium over market price to gain control) NCI comprises of 3 items: Non – controlling interests Share of book value of net assets Share of unamortized FV adjustment (FV - BV) unimpaired goodwill Tan, Lim & Lee Chapter 4 © 2015

Under the fair value option: Journal entry to record NCI at fair value (re-enacted each year): Dr Share capital of subsidiary Retained earnings at acquisition date Other equity at acquisition date FV differentials (FV- BV) Goodwill (Parent & NCI) Dr/Cr Deferred tax asset/ (liability) on fair value adjustment Cr Investment in subsidiary FV differentials (BV – FV) Non-controlling interests (At fair value) Tan, Lim & Lee Chapter 4 © 2015

Under the 2nd option: NCI is a proportion of the acquiree’s identifiable net assets (i.e. not full fair value) NCI comprises of 2 items: Non – controlling interests Share of book value of identifiable net assets Share of unamortized of FV adjustments (FV- BV) Tan, Lim & Lee Chapter 4 © 2015

Under the 2nd option: Journal entry to record NCI (re-enacted each year): Dr Share capital of subsidiary Retained earnings at acquisition date Other equity at acquisition date FV differentials (FV – BV) Goodwill (Parent only) Dr/Cr Deferred tax asset/ (liability) on FV adjustment Cr FV differentials (BV – FV) Investment in S subsidiary Non-controlling interests (NCI % x FV of identifiable net assets) Tan, Lim & Lee Chapter 4 © 2015

Illustration 3: Non-Controlling Interests’ Share of Goodwill
The FV of NCI that owned 10% of Subsidiary A as at 31 Dec 20x1(Acquisition date) was $25,000. The financial statements of Subsidiary A as at acquisition date are as shown below. Subsidiary A had unrecognized intangible assets with fair value of $40,000. Tax rate is 20%. Determine NCI’s good will as at acquisition date. Subsidiary A’s Statement of Financial Position as at 31 December 20x1: Net assets 160,000 Equity 140,000 Share Capital 20,000 Retained Earnings Tan, Lim & Lee Chapter 4 © 2015

Illustration 3: Non-Controlling Interests’ Share of Goodwill
Fair value of NCI 25,000 Fair value of identifiable net assets Book value of equity 160,000 Fair value of intangible assets 40,000 Deferred tax on intangible assets (8,000) 192,000 NCI's share of FV of identifiable net assets (10%) 19,200 NCI's goodwill (25, ,200) 5,800 Under alternative basis where NCI are measured as a proportion of the recognized amounts of the identifiable assets as at acquisition date: NCI’s goodwill is zero Amount to be recognized as NCI is $19,200 only Tan, Lim & Lee Chapter 4 © 2015

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 Subsequent extinguishment of the different between the fair value and book value of identifiable net assets; and Goodwill (if the fair value alternative is adopted) Tan, Lim & Lee Chapter 4 © 2015

Reconstructing NCI on Statement of Financial Position
Date of acquisition NCI have a share of Share capital Retained earnings Other equity Fair value differentials Goodwill Change in share capital Change in retained earnings Change in other equity Past amortization of fair value differential Past impairment of goodwill Profit after tax Current amortization of fair value differential Current impairment of goodwill Dividends as a repayment of profits Incorporation date Beginning of current year End of current year Tan, Lim & Lee Chapter 4 © 2015

Reconstructing NCI on Statement of Financial Position
At each reporting date, group will re-create NCI account in the consolidated financial statement by recognizing the sequential build up: As of acquisition date From acquisition date to beginning of the current period During the current period Known as the “re-enactment process” of the attribution of equity to NCI Tan, Lim & Lee Chapter 4 © 2015

Allocation to Non-controlling Interests
Allocation of the change in equity from date of acquisition to the beginning of the current period No distinction between pre-acquisition or post-acquisition profits To transfer the NCI’s share of subsidiary’s retained earnings to NCI Dr Retained earnings (NCI % x in RE from acquisition date to beginning of current period) Cr NCI Tan, Lim & Lee Chapter 4 © 2015

Allocation of current profit after tax to NCI Attribution of profit to NCI is not expense item and should not be shown above the profit after tax line Without attribution, retained earnings of the group would be over-stated and NCI’s share of equity would be under-stated The same attribution principle applies to Other Comprehensive Income (OCI) – NCI are attributed their share of OCI arising during a period Examples: Revaluation surplus or deficit on property, PPE and intangible assets etc. Dr Income to NCI Cr NCI Tan, Lim & Lee Chapter 4 © 2015

Allocation of dividends to NCI Reverses the profit and loss effects of dividends in consolidated income statement A repayment of profits by a subsidiary Reduces the NCI’s residual stake in the net assets of the subsidiary Dr Dividend income (Parent) NCI (Equity) Cr Dividends declared (Subsidiary) Tan, Lim & Lee Chapter 4 © 2015

Can NCI be a debit balance?
IFRS 10 paragraph B94 (Appendix B) requires NCI to have a debit balance if: NCI share of losses > NCI existing share of the subsidiary’s share capital, retained earnings and other equity items Departure from an earlier version of IAS 27 that requires NCI to be carried at zero balance Losses being borne by majority shareholders unless the NCI have binding obligation to make further investments to make good the losses Opposing views on NCI being a debit balance Parent who has control of subsidiary should bear the responsibility of supporting an insolvent subsidiary Limited liability argument: NCI stand to lose only their investment and have no legal obligation to bear any further losses Tan, Lim & Lee Chapter 4 © 2015

Can NCI be a debit balance?
IASB’s support for NCI to be a debit balance NCI participate proportionally in the risks and rewards of a subsidiary Limited liability argument: Parent stand to lose only their investment and have no legal obligation to bear any further losses in the absence of guarantees Tan, Lim & Lee Chapter 4 © 2015

Analytical check on Non-controlling Interests’ balance
If the fair value basis is adopted NCI in a subsidiary have a share in the same three components that the parent has under the acquisition method If NCI are recognized as proportion of FV of identifiable net assets Only two components apply to non-controlling interests Share of book value of net assets or shareholders’ equity of a subsidiary Share of the balance of unamortized fair value adjustments If NCI have both present ownership interests (e.g. ordinary shares) and potential ownership interests (e.g. options) Only present ownership interests may be measured as a proportion of identifiable net assets Tan, Lim & Lee Chapter 4 © 2015

Analytical check on Non-controlling Interests’ balance
NCI’s share of (NCI % multiply by): Book value of net assets of subsidiary at year-end +/- unrealized profit/loss from upstream sale Unamortized balance of FV adjustments at year-end Unimpaired balance of goodwill at year end ([Acquisition-date FV of NCI – NCI % x acquisition-date FV of identifiable net assets] less any cumulative impairment) NCI’s balance at year-end = Tan, Lim & Lee Chapter 4 © 2015

Effects of amortization, depreciation and disposal of undervalued or overvalued assets and liabilities subsequent to acquisition Accounting for non-controlling interest under IFRS 3 Goodwill impairment tests Conclusion Goodwill impairment tests Tan, Lim & Lee Chapter 4 © 2015

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 IFRS 8 Operating Segments Goodwill will be allocated to each of the acquirer’s CGU, or group of CGUs Tan, Lim & Lee Chapter 4 © 2015

Carrying amount: Net assets of the cash-generating unit It includes entity goodwill attribute to parent and NCI Recoverable amount: IAS 36 allows the higher of the below two metrics to determine recoverable amount: Higher of FV less cost to sell (an arms-length measure) Uses market based inputs or market participants’ assumptions in the valuation process Value-in-use (VIU) Present value of future net cash flows Uses internal or entity-specific input to determine the future cash flows VIU likely to be more discretionary as assumptions about future cash flows are required Tan, Lim & Lee Chapter 4 © 2015

If carrying amount > recoverable amount Impairment loss is first allocated to goodwill Then to other assets in proportion to their individual carrying amounts Impairment tests to be carried out on annual basis; regardless of whether indications of impairment exists Impairment once made is not reversible, as it may result in the recognition of internally-generated goodwill which is prohibited under IAS 38 Tan, Lim & Lee Chapter 4 © 2015

Steps for impairment test Determine the carrying amount of the CGU Determine the recoverable amount of the CGU Recoverable amount: Higher of fair value or value in use If carrying amount ≤ recoverable amount If carrying amount ≥ recoverable amount No impairment loss Allocate impairment loss to goodwill first and balance to other net assets Tan, Lim & Lee Chapter 4 © 2015

NCI at FV at acquisition date NCI as a proportion of identifiable net asset at acquisition date Goodwill on consolidation Includes NCI’s goodwill Excludes NCI’s 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 Tan, Lim & Lee Chapter 4 © 2015

Illustration 4: Goodwill Impairment Test
Company X has 80% ownership in a CGU with identifiable net assets of $6 million as at 31 Dec 20x1. The recoverable amount of the CGU as an entity was $5 million as at that date. Determine the impairment loss of goodwill in the CGU under two alternative measurement basis: NC measured at FV at acquisition date. Goodwill recognized by CGU was $1.2 million NCI measured as a proportion of FV of identifiable net assets at acquisition date. Goodwill recognized by CGU was $1 million Tan, Lim & Lee Chapter 4 © 2015

Question (a) Goodwill Identifiable net assets Total Carrying amount 1,200,000 6,000,000 7,200,000 Recoverable amount 5,000,000 Impairment loss 1,000,000 2,200,000 Impairment loss borne by Parent and NCI Explanatory notes: Goodwill allocated to a CGU to enable comparison between carrying amount of all assets of the unit and recoverable amount Goodwill attributable to NCI is included under recognized goodwill (no further adjustment is required) Tan, Lim & Lee Chapter 4 © 2015

Question (b) Goodwill Identifiable net assets Total Carrying amount 1,000,000 6,000,000 7,000,000 NCI's stet share of goodwill (20% x $1million/0.8) 250,000 Notionally adjusted carrying amount 1,250,000 7,250,000 Recoverable amount 5,000,000 Impairment loss 2,250,000 Impairment loss recognized (80% x $1.25 million) Explanatory notes: Since comparison is done against the carrying amount of assets of a CGU, goodwill is regrossed under alternative (b) to show theoretical goodwill as at date of acquisition NCI unrecognized share of goodwill is included Tan, Lim & Lee Chapter 4 © 2015

Conclusion Two sets of financial statements must be presented:
Investor’s separate financial statements for the legal entity Consolidated financial statements for group of companies Although two sets of accounts exist, only one set of “books” has to be kept by the legal entity Consolidation worksheets are used to prepare consolidated financial statement Summation of line items of the financial statements of parents and subsidiaries Incorporation of adjustments to eliminate and adjust intragroup transactions and balances Transactions and balances in consolidated financial statement reflect group’s perspective Tan, Lim & Lee Chapter 4 © 2015

Conclusion All business combinations are accounted for using the acquisition method Entails an “asset substitution process” Acquirer is deemed to have obtained control of all assets and liabilities of acquiree. Acquisition date is a critical economic event (exchange of economic resources between acquirer and the former-owners) Use of fair values to recognize assets and liabilities Unrecognized intangible assets and contingent liabilities recognized if they meet criteria in IFRS 3 NCI included as a component in equity Tan, Lim & Lee Chapter 4 © 2015

Conclusion Under the acquisition method:
Consideration transferred = Fair value of (assets transferred + liabilities incurred + equity interests issued by acquirer + contingent consideration) Asset substitution process: 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 Tan, Lim & Lee Chapter 4 © 2015

Advanced Financial Accounting: Chapter 4

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