AFA2e Chapter03 PPT

Advanced Financial
Accounting: Chapter 3
Group Reporting II
Tan, Lim & Lee Chapter 3 © 2015 1

Learning Objectives
1. Understand the difference between investor’s separate financial

statements and the consolidated statements;
2. Understand the differences and similarities in various mode of
business combinations;
3. Appreciate the acquisition method and its implications;
4. Know how to determine the amount of consideration transferred;
5. Understand the identification of the acquirer;
6. Know how to recognize and measure identifiable net assets,
liabilities and goodwill in accordance to IFRS 3; and
7. Understand the nature of goodwill.

Content
1. Introduction
Introduction
2. Overview of the consolidation process
3. Business combinations
4. Determining the amount of consideration transferred
5. Recognition and measurement of identifiable assets, liabilities and
goodwill
6. Conclusion

Introduction
Separate financial Consolidated financial
statements statements
(Legal entity) (Economic entity)
Governing rules and In accordance with
In accordance with IFRS 10
regulations corporate regulations
IFRS 10 allowed for exemptions
by a parent if it’s :
 A wholly owned or partially
owned subsidiary;
 Debt or equity instruments not
traded in public;
Possible exemptions
No exemption  Did not file financial
for presentation
statements for purpose of
issuing instruments to public;
and
 Ultimate parent produces
consolidated financial
statements.
Separate Vs Consolidated
Financial Statement
Separate financial Consolidated financial
statements statements
(Legal entity) (Economic entity)
Income recognition Dividends Share of profits
Investment in a subsidiary
carried at: Investment in a subsidiary:
• Cost (IAS 27) or • Investment is eliminated and
subsidiary’s net assets are added
• As a financial instrument to the parent (IFRS 10)
(IFRS 9)
Asset recognition
Investment in an associate Investment in an associate:
carried at:
• Equity method (IAS 28)
• Cost (IAS 28) or
• As a financial instrument
(IFRS 9)

Content
1. Introduction
2. Overview of
Overview of the
the consolidation
consolidation process
process
goodwill
6. Conclusion

Consolidation Process
Legal entities Economic entity
Parent’s Subsidiaries' Consolidation adjustments Consolidated

Financial + Financial +/- and eliminations = financial
Statements Statements statements
• 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’s and subsidiaries financial statements
– Adjust or eliminate effects of intra-group transactions and balances
– Allocate profit to non-controlling interests

Intragroup Transactions
• Intragroup transactions are eliminated to:
– Show the financial position, performance and cash flows of the economic (not
legal) entity.
– Avoid double counting of transactions within the economic entity.
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 Sales 2,000,000
Cr Cost of sales 2,000,000

Intragroup Transactions
Extract of consolidated worksheet
Consolidation
elimination entries
Parent's Subsidiary's Consolidated
and adjustment
Income Income income Without
Statement Statement Dr Cr statement elimination
Sales $2,000,000 $3,000,000 2,000,000 $3,000,000 $5,000,000
Cost of ($3,000,000
sales (1,000,000) (2,000,000) 2,000,000 (1,000,000) )
Gross
profit $1,000,000 $1,000,000 $2,000,000 $2,000,000
Note: Without elimination the consolidated sales and cost of sales figures
will be overstated by $2 M.
* The consolidation process will be discussed in greater detail in Chap 4.

Content
1. Introduction
3. The acquisition
Business method
Combinations
goodwill
6. Conclusion

Business Combinations
Where an acquirer
obtains control of
Business
one or more
combinations
businesses (IFRS 3
App A)
Examples: IFRS 3 App B:B6
Legal merger Net assets Former

Businesses
of net assets of combining owners of a
become
of acquired entities transferred combining entity
subsidiaries of
businesses into to a newly-formed obtains control
acquirer
acquirer’s books entity of combined entity

Business Combinations
• Business combinations may take different forms ; however two
characteristics are present:
• 3 main attributes of control

Acquirer has • Power over acquiree
control of • Exposure or rights to variable returns of acquiree
• Ability to use power to affect acquiree’s returns.
business acquired
• 2 vital characteristics of a business

Target of (IFRS 3)
acquisition is a • Integrated set of activities and assets
• Capable of being conducted and managed to
business provide returns (i.e. dividends) to investors and
other stakeholders.
Business combinations involving entities under common control is outside of scope of

IFRS 3
The Acquisition Method
• IFRS 3 requires all business combinations to be accounted for using
the acquisition method from the perspective of an acquirer.
• An acquirer can obtain control in an acquiree through:

1. Acquisition of assets and assumption of liabilities of acquiree
 Include assets and liabilities not previously recognised by
acquiree: contingent liabilities, brand name, in-process R&D etc.
2. Acquisition of controlling interest in the equity of acquiree
 Deemed to be effective acquisition of assets and assumption of
liabilities of acquiree
 Control over an acquiree in substance means that acquirer has
control over net assets of acquiree
 Effects: (2) accounted for as if they are effects of (1)
3. Combination of (1) and (2)*
 Effects: Accounted for as if they are effects of (1)

The Acquisition Method
4-step
• The procedures: approach:
IFRS 3:5
Identify the acquirer
Determine the acquisition date
Recognize and measure the identifiable assets acquired

Group the liabilities assumed and any non-controlling
financial interest in the acquiree; and
statements
if acquire
subsidiaries Recognize and measure goodwill or
a gain from a bargain purchase

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
– Concept of control is based on IFRS 10 but the standard may not
always conclusively determine the identity of the acquirer.
– IFRS 3 Appendix B provides additional criteria to identify controlling
acquirer.

Identify the Acquirer
Additional control criteria under IFRS 3 Appendix B
Based on consideration
Based on entity size Based on dominance
transferred
Acquirer is the entity that: Acquirer is the entity: Acquirer is the entity:
• Transfers cash or other • Whose owners hold the • Whose owners have the
assets or incurs liabilities to largest relative voting rights ability to elect, appoint or
acquire another entity in a combined entity remove a majority of
directors
 Issues shares as • Whose owners hold the
consideration to acquire largest minority voting • Whose management is
shares of another entity interest in the combined dominant in the combined
entity (if no other entity has entity
 Pays a premium over the significant voting interest)
fair value of the equity •Who initiates the business
interest • Which is larger in size combination
Identify the Acquirer – Reverse
Acquisition
• Reverse acquisition
– Legal parent is the acquiree and legal subsidiary is the acquirer
– Often initiated by the legal subsidiary
– Motive for entering into such an arrangement often to seek a backdoor
listing
• Exchange of shares in a reverse acquisition

1. Company A (Legal parent) takes Owners of Company B
over shares of Company B from (Legal subsidiary)
owners
2. Company A issues own shares
Company A to owners of Company B as
(Legal parent) purchase consideration
Company B
3. Company B has the power and ability (Legal subsidiary)
to affect the returns of the legal parent
after the share exchange
Identify the Acquirer – Reverse
Acquisition
Example
On 1 July 20x5, P (private), arranged to have all its shares acquired by L
(public listed). The arrangement required L to issue 20 million shares to P’s
shareholders in exchange for the existing 6 million shares of P. Existing shareholders
of L owned 5 million of L.
After the issue of 20 million L shares, P’s shareholders now owned 80% (20
million shares out of a total of 25 million shares) of the issued shares of the combined
entity. L’s shareholders owned 20% of the shares in the combined entity after the share
issue. P’s shareholder act in concert to exercise control over the combined entity.
L’s shareholders P’s shareholders

(5 million shares) (20 million shares)
20% 80%
L
100%

Content
1. Introduction
4. Determining the
Determining the amount
amount of
of consideration
consideration transferred
transferred
goodwill
6. Conclusion

Determine the Amount of
Consideration Transferred
Consideration Fair value Fair value Fair value of Fair value of
transferred* = + + equity
+ contingent
of assets of liabilities
transferred incurred interests consideration
issued by
acquirer to
former
owners
• *Fair value (FV) 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
– Acquisition-related costs are not included

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:
– Remeasure in fair value and recognize gain or loss in the acquirer’s
separate financial statements
– Remeasured gain or loss is not recognized if the asset or liabilities
remain in the combined entity’s financial statements
• If transfer of monetary assets or liabilities are deferred, the time

value of money should be recognized:
– The fair value will be the present value of the future cash outflows
– Eg. Future cash settlement of $1,000,000 is due 3 years later and 3%
interest is levied
Present value to be recognised = $1,000,000/ (1+0.03)^3
= $915,142

Fair value of Equity Interests
Issued by the Acquirer
• Fair value of equity interests issued is measured:
– (1) By market price (e.g. published quoted prices of shares)
– (2) With reference to either the acquisition date fair value of the acquirer OR
acquiree, whichever is more reliable. (For example, if market price is not
available or not reliable for the acquiree, use the fair value of the acquirer)
• Illustration of (2) Issues X number of shares
Acquirer Owners of Acquiree

Conveys A number of shares to acquirer
Total number of
shares after
issue: Y Gains control over acquiree
FV of acquirer’s
equity: $Z Acquiree
FV of equity issued is either:
• X/Y multiplied by $Z; or
• A/B multiplied by $C

Illustration 1:
Fair Value of Equity Issued
P Ltd acquires 100% of S Co through an issue of 5,000,000 shares
to the owners 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 30,000,000 9,000,000

Illustration 1:
Situation 1: P Ltd’s market price is a reliable indicator
Consideration transferred = 5,000,000 shares x $ 2.00

= $10,000,000
Situation 2: Fair value of S Co is a better estimate
Consideration transferred = $9,000,000
Explanation: Since P Ltd is acquiring 100% of S Co, the fair value of

the equity (FV of S Co. as a whole including the implicit goodwill)
acquired by P is $9 million.

(old power point)Illustration 1:
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 $30,000,000

= $9,000,000
Q3: Fair value of S Co is a better estimate

Consideration transferred = $9,000,000
Tan & Lee Chapter 3 © 2009 25

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. Event A: acquirer gets a refund of part of the consideration transferred if the
acquiree does not achieve the target profit
• Fair value of contingent consideration or refund will change as new information
arises
– Fair value of the contingent consideration has to be estimated (For event A)

is deducted from consideration transferred
– Fair value of contingent consideration is adjusted retrospectively as a

correction of error if events after acquisition reveal information that was
missed or misapplied during the acquisition date

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
tenure of the loan
– Journal entry for the payment of debt issuance cost
Dr Unamortized debt issuance costs
Cr Cash
• 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 Equity
Cr Cash

Content
1. Introduction
5.
5. Recognition and
Recognition and measurement
measurement of
of identifiable
identifiable assets,
assets, liabilities
liabilities and
and
goodwill
goodwill
6. Conclusion

Recognition Principle
Business Combinations are accounted under the acquisition method
Requirement: At acquisition date, the acquirer will recognize

acquiree’s net assets at fair value
Underlying assumption:
There is an effective ”acquisition” of the
There has been an exchange transaction at
subsidiary’s identifiable assets and liabilities
arm-length pricing
at fair value

• Identifiable net assets (INA) must comply with two conditions to
qualify for recognition:
– (1) INA must meet the definition of an asset or a liability
– (2) INA must be priced into the consideration transferred and not a
separate stand-alone transactions
• Concept of separate transactions:

– Transaction that is entered into for the benefit of acquirer rather than
acquiree
– Pre-existing relationship with acquiree – for e.g. as a supplier – the
payment for the goods is separate from the consideration transferred
– However, certain pre-existing relationship can be classified as
“reacquired rights” and should be recognized as an intangible asset
on the basis of the remaining contractual term of the contract – for e.g.
Reacquiring franchised rights granted to acquiree

At acquisition date:
• Fair value differential
Fair value will be recognized in
differential the consolidation
worksheet
In subsequent years:
• Depreciation/amortization/
cost of sale of asset will be
Book value of Fair value of based on the fair value
subsidiary’s subsidiary’s recognized at the
identifiable net identifiable net acquisition date
assets assets
These entries have to be re-
enacted every year until the
disposal of investment

Classification of Identifiable Assets
or Liabilities
• Classification of identifiable assets or liabilities is made with respect
to:
1. Information;
2. Conditions; and
3. Corporate policies existing as at acquisition date
Example: Bond investment
Reclassified as held-to-
Classified as Available-
maturity according to
for-sale securities
acquirer’s group policy
Under acquiree’s financial statements Under consolidated financial statements

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
consolidated financial statements
– Rationale: the acquisition event justifies recognition of intangible
assets
– Do not provide guidance on measurement of fair value of the
recognized intangible asset
• To qualify for recognition, the intangible asset must either:

1. Be Separable (“Separability criterion”) OR
2. Arises from contractual or other legal rights (“Contractual-legal
criterion”)
Example of intangible assets: Brand names and customer
relationships – When Heineken acquired APB; it acquired the iconic
Tiger Beer Brand.

Intangible Assets
Are these considered intangible assets?
Assembled workforce with × No: Firm-specific and integrated
specialized knowledge with acquiree
× (Fails separability criterion)
Potential contracts or contracts under × No: Fails separability or
negotiation contractual-legal criterion
Opportunity gains from an operating  Yes: Meets the contractual-legal

lease in favorable market conditions criterion
Customer and subscriber lists of  Yes: Meets the separability criterion
acquiree (show evidence of exchange
transactions for similar types of
lists)

Contingent Liabilities &
Provisions
• Contingent liabilities are recognized by acquirer if they are:
– Present obligations arising from past events and
– Reliably measurable, even if outcome is not probable (IFRS 3:23)
• Example: Provisions for restructuring & termination costs are

recognized if they are:
Probable
outflow of
Reliably
economic
measurable
resources
Present
constructive or
legal obligations
arising from past
events
Indemnification Assets
• Contractual indemnity
– Provided by the former owners of the acquiree to the acquirer to make
good any subsequent 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
• Example: An acquiree is exposed to a contingent liability. Based on

probabilistic estimation, the FV of the contingent liability is $100,000. The
former owners provide a contractual guarantee to indemnify the acquirer of
the loss.
– In the consolidated balance sheet, the acquirer recognizes contingent
liabilities and an indemnification asset of $100,000 at FV
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 because the basis for taxation does
not change in a business combination
– i.e. The excess of fair value over book value of identifiable net assets
will give rise to a taxable temporary difference and vice versa.
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
• No deferred tax liability is recognized on goodwill as goodwill is a

residual

Non-controlling interests
• Non-controlling interests (NCI) arises when acquirer obtains control of a
subsidiary but does not have full ownership of voting rights.
• In a business combination, NCI are recognized by the acquirer as equity based

on the following equation
– Rationale: To represent outside interests’ share in the net assets of the
acquiree
Assets - Liabilities = Equity
Carrying Carrying
amount of amount of
acquirer’s acquirer’s Acquirer’s
assets + liabilities + equity + NCI
Acq date FV Acq date of share of
of acquiree’s FV of equity of
identifiable acquiree’s acquiree
assets + identifiable
Goodwill liabilities
Non-controlling interests
• IFRS 3 allows NCI at acquisition date to be measured at either:
– Fair value; or
– The present ownership instruments’ proportionate share in the
recognized amount of identifiable assets
Fair value method Proportionate share of identifiable

assets method
• Obtain a reliable measure of • Applies present ownership interests
fair value of NCI (e.g. quoted held by NCI to the recognized amounts
price in active market) of identifiable net assets to determine
initial amount of NCI
• In absence of quoted price, use
valuation techniques to value • If NCI have potential ordinary shares,
NCI (e.g. peer companies’ they should be measured at fair value
valuation or appropriate
assumptions)
Goodwill
• A premium that an acquirer pays to achieve synergies from business
combination
– Must be recognized separately as an asset
– Determined as a residual
• IFRS 3 allows 2 ways of determining goodwill:
Goodwill = Fair value of consideration transferred - Acquiree’s
+ recognized net
Fair value of non-controlling interests identifiable assets
+ measured in
Fair value of the acquirer’s previously accordance with
held interest in the acquiree IFRS 3
Fair value of non- Measured at fair value at acquisition date

controlling interests (include goodwill)
Measured as a proportion of identifiable

assets as at acquisition date

Goodwill
Goodwill
Depends on reliable Integral to the entity as

measurement of An expectation of Integral to the entity as a
consideration transferred, a whole, not
future economic benefits
individually
whole, not individually
NCI, previously held identifiable identifiable or severable
equity interests and arising from acquisitionor severableas a standalone asset
identifiable net assets as a standalone asset

Goodwill
• The “top-down approach” (Johnson and Petrone, 1998) results in
measurement errors in goodwill
Consideration transferred +
Overpayment for an
Fair value of non-controlling interests
acquisition or
overvaluation of
consideration
transferred
Identifiable net assets

IFRS 3 suggests that
Measurement and
the “one-year
recognition errors
“measurement period” is
important to rectify
measurement and
Goodwill recognition errors to
The above errors should not be
ensure the accuracy and
included as part of “goodwill”
“purity” of goodwill
Goodwill
• In a “bottom-up” approach (Johnson and Petrone, 1998):
Goodwill
Internally-generated
Goodwill Fair value of synergies
(Combination goodwill)
(Core Goodwill)
• “Going concern element” • Generated from the unique

and represent the ability of combination of the acquirer
acquiree to generate higher and acquiree
rate of return than from its
individual assets • FV of the group > than sum
of FV of individual entities
Illustration 1: Goodwill
Illustration 1
On 1 July 20x1, P purchased 1.5 million shares from S Co’s existing owners.
Total number of shares issued by S Co was 2 million. A reliable FV of S Co’s
share was $10/share. P Co was obligated to pay an additional $1 million to
vendors of S Co if S Co maintained existing profitability over the subsequent
two years from 1 July 20x1. It was highly likely that S Co would achieve this
expectation and the fair value of the contingent consideration was assessed at
$1 million. FV of NCI as at 1 July 20x1 was $5 million. Assume a tax rate of
20%
Additional information of S Co.
• Book value of net assets: $3,650,000
• FV of net assets : $14,350,000
• FV less book value (net assets): $10,700,000
• Share capital: $2,000,000
• Retained earnings: $1,650,000

Illustration 1: Goodwill
Determine the acquirer's interest in the acquiree:
1,500,000
Percentage ownership = (75%)
2,000,000
Consideration transferred: = ($1,500,000 x $10) + $1,000,000 [FV of

contingent consideration]
= $16,000,000
Determine goodwill: Consideration transferred + FV of NCI – FV of identifiable net

assets at acquisition date
Determine deferred tax liability of (20% x $10,700,000) = $2,140,000

Determine FV of identifiable net assets = $14,350,000 - $2,140,000 = $12,210,000
Goodwill = $16,000,000 + $5,000,000 - $12,210,000 = $8,790,000

Gain From a Bargain Purchase
• A gain from bargain purchase arises when:
Fair value of consideration transferred Acquiree’s net
<
+ identifiable assets
Fair value of non-controlling interests measured in
+ accordance with
Fair value of the acquirer’s previously IFRS 3
held interest in the acquiree
• In essence, a windfall gain to acquirer

• 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

Measurement Period
• IFRS 3 allows adjustments to be made retrospectively to “provisional
amounts” relating 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 (“Measurement period”)
• Events and circumstances arising after acquisition date does not lead to
measurement period adjustments
• Adjustments only allowed because of incorrect or incomplete information
available as at acquisition date but was missed or misapplied
• After measurement period (1 year), any correction of errors will be

deemed as a prior - period adjustment (IAS 8)
• Exception: Any change in estimate arising from information on new events
and circumstances arising after acquisition date will be recognized in the
current period
• Example: acquirer may fail to obtain information on all contracts of acquiree
as at acquisition date
Measurement Period – Summary
Retrospective
Error: Discovery of Any correction of
change: Adjust
info on facts and error after end of
goodwill, fair
circumstances measurement period
value of
existing as of requires prior period
identifiable net
acquisition date item disclosures
assets, fair value
of NCI as if the
accounting was
completed on
Acquisition 12 months
acquisition date
date End of
measurement
Prospective period
Change in change: no
estimate: correction of
Circumstances goodwill, fair
arising after value of
acquisition date identifiable net
assets or fair
value of NCI
Conclusion
• All business combinations are characterized by three conditions:
1. Existence of acquirer
2. Acquirer has control over an acquiree
3. Acquiree is a business
• Many modes of business combinations:
– Acquirers acquires net assets of the business
(Consequence: Assets and liabilities acquired recognized in the acquirer’s legal
entity financial statements)
– Acquirer acquires control over the equity of the acquiree
(Consequence: acquirer and acquiree retain separate legal identities but
economically, these entities belong to same group)
– Regardless of form, economic substance of combination is the same
and acquisition method should be applied

Conclusion
• Acquisition method
– Identify acquirer with reference to the control criteria of IFRS 10
– Recognize and measure identifiable net assets at fair value at acquisition
date
– Goodwill is a residual figure and is determined on a “top-down” approach
 May include recognition and measurement errors and identifiable
elements
• Measurement period
– Acquirers are allowed a 12 month measurement period to correct and revise
the following on a retrospectively basis:
1. Provisional amounts of goodwill
2. Fair value of identifiable net assets
3. Fair value of Non-controlling interests
4. Fair value of previously held interests

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Advanced Financial

Tan, Lim & Lee Chapter 3 © 2015 1

1. Understand the difference between investor’s separate financial

Tan, Lim & Lee Chapter 3 © 2015 2

Tan, Lim & Lee Chapter 3 © 2015 3

Income recognition Dividends Share of profits

Tan, Lim & Lee Chapter 3 © 2015 5

Tan, Lim & Lee Chapter 3 © 2015 6

Parent’s Subsidiaries' Consolidation adjustments Consolidated

• Consolidation is the process of preparing and presenting the

Tan, Lim & Lee Chapter 3 © 2015 7

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

Tan, Lim & Lee Chapter 3 © 2015 8

* The consolidation process will be discussed in greater detail in Chap 4.

Tan, Lim & Lee Chapter 3 © 2015 10

Examples: IFRS 3 App B:B6

Legal merger Net assets Former

Tan, Lim & Lee Chapter 3 © 2015 11

• 3 main attributes of control

• 2 vital characteristics of a business

Business combinations involving entities under common control is outside of scope of

• An acquirer can obtain control in an acquiree through:

Tan, Lim & Lee Chapter 3 © 2015 13

Determine the acquisition date

Recognize and measure the identifiable assets acquired

Tan, Lim & Lee Chapter 3 © 2015 14

Tan, Lim & Lee Chapter 3 © 2015 15

• Exchange of shares in a reverse acquisition

L’s shareholders P’s shareholders

Tan, Lim & Lee Chapter 3 © 2015 18

Tan, Lim & Lee Chapter 3 © 2015 19

• *Fair value (FV) of the consideration transferred:

Tan, Lim & Lee Chapter 3 © 2015 20

• If transfer of monetary assets or liabilities are deferred, the time

Tan, Lim & Lee Chapter 3 © 2015 21

• Illustration of (2) Issues X number of shares

Acquirer Owners of Acquiree

Tan, Lim & Lee Chapter 3 © 2015 22

Tan, Lim & Lee Chapter 3 © 2015 23

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

Situation 2: Fair value of S Co is a better estimate

Consideration transferred = $9,000,000

Explanation: Since P Ltd is acquiring 100% of S Co, the fair value of

Tan, Lim & Lee Chapter 3 © 2015 24

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

Q2: P Ltd’s market price is not a reliable indicator; a proportional

Consideration transferred = (5,000,000/15,000,000) x $30,000,000

Q3: Fair value of S Co is a better estimate

Tan & Lee Chapter 3 © 2009 25

– Fair value of the contingent consideration has to be estimated (For event A)

– Fair value of contingent consideration is adjusted retrospectively as a

Tan, Lim & Lee Chapter 3 © 2015 26

• Costs of issuing equity are recognized in accordance with IAS 32

Tan, Lim & Lee Chapter 3 © 2015 27

Tan, Lim & Lee Chapter 3 © 2015 28

Business Combinations are accounted under the acquisition method

Requirement: At acquisition date, the acquirer will recognize

Tan, Lim & Lee Chapter 3 © 2015 29

• Concept of separate transactions: