Question

Topic: Business Acquisitions JB Company recently acquired 100% of Sampson Company for $150,000 cash. Both companies are located outside of the United States and JB needs to prepare consolidated financial statements. JB provided the following information regarding the Sampson’s account values at acquisition: Account Cost basis Fair value basis Accounts receivable (net) $25,000 $20,000 Building $150,000 $200,000 Accounts payable $18,000 $18,000 Bonds payable $100,000 $125,000 Required: Utilize eIFRS to find authoritative guidance regarding business acquisitions and the valuation of items acquired. Prepare the acquisition journal entry based upon your research. Prepare a report to be presented to JB Company’s management with specific authoritative literature references.

Account Cost Basis Fair Value Basis

Accounts receivable (net) Building   $25,000   $20,000
Building   $150,000   $200,000
Accounts payable $18,000 $18,000

Bonds payable $100000. $125000

Required: Utilize eIFRS to find authoritative guidance regarding business acquisitions and the valuation of items acquired. Prepare the acquisition journal entry based upon your research. Prepare a report to be presented to JB Company’s management with specific authoritative literature references.

Answer 1

IFRS 3 Business Combinations applies when an acquirer obtains control of a business. IFRS 3 defines a business as 'an integrated set of activities and assets that is capable of being conducted and managed to provide a return in the form of dividends, lower costs, or other economic benefits'

The acquisition method

The acquisition method has the following requirements:

• Identifying the acquirer .

• Determining the acquisition date.

• Recognising and measuring the subsidiary's identifiable assets and liabilities.

• Recognising goodwill (or a gain from a bargain purchase) and any noncontrolling interest.

Identifying the acquirer

The acquirer is the entity that has assumed control over another entity. In a business combination, it is normally clear which entity has assumed control.

The acquisition date

The acquisition date is the date on which the acquirer obtains control over the acquiree. This will be the date at which goodwill must be calculated and from which the incomes and expenses of the acquiree will be consolidated.

Identifiable assets and liabilities

The acquirer must measure the identifiable assets acquired and the liabilities assumed at their fair values at the acquisition date. IFRS 3 says that an asset is identifiable if:

• It is capable of disposal separately from the business owning it, or

• It arises from contractual or other legal rights, regardless of whether those rights can be sold separately.

The identifiable assets and liabilities of the subsidiary should be recognised at fair value where:

• they meet the definitions of assets and liabilities in the 2010 Conceptual Framework for Financial Reporting, and

• they are exchanged as part of the business combination rather than a separate transaction.

Note that IFRS 3 was not updated to refer to the revised element definitions in the 2018 Conceptual Framework. The 2010 Conceptual Framework defined assets and liabilities as follows:

• assets are resources controlled by an entity from a past event that are expected to lead to an inflow of economic benefits

• liabilities are present obligations from a past event that are expected to lead to an outflow of economic resources. Items that are not identifiable or do not meet the definitions of assets or liabilities are subsumed into the calculation of purchased goodwill.

Watch out for the following items:

• Contingent liabilities are recognised at fair value at the acquisition date. This is true even where an economic outflow is not probable. The fair value will incorporate the probability of an economic outflow.

• Provisions for future operating losses cannot be created as this is a postacquisition item. Similarly, restructuring costs are only recognised to the extent that a liability actually exists at the date of acquisition.

• Intangible assets are recognised at fair value if they are separable or arise from legal or contractual rights. This might mean that the parent recognises an intangible asset in the consolidated financial statements that the subsidiary did not recognise in its individual financial statements, e.g. an internally generated brand name.

• Goodwill in the subsidiary's individual financial statements is not consolidated. This is because it is not separable and it does not arise from legal or contractual rights. There are some exceptions to the requirement to measure the subsidiary’s net assets at fair value when accounting for business combinations. Assets and liabilities falling within the scope of the following standards should be valued according to those standards:

• IAS 12 Income Taxes

• IAS 19 Employee Benefits • IFRS 2 Share-based Payment • IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

Recognising Goodwill :-

Goodwill should be recognised on a business combination. This is calculated as the difference between: 1 The aggregate of the fair value of the consideration transferred and the non-controlling interest in the acquiree at the acquisition date, and

2 The fair value of the acquiree's identifiable net assets and liabilities.

Purchase consideration When calculating goodwill, purchase consideration transferred to acquire control of the subsidiary must be measured at fair value. When determining the fair value of the consideration transferred, remember that:

• Contingent consideration is included even if payment is not deemed probable. Its fair value will incorporate the probability of payment occurring.

• Acquisition costs are excluded from the calculation of purchase consideration. – Legal and professional fees are expensed to profit or loss as incurred – Debt or equity issue costs are accounted for in accordance with IFRS 9 Financial Instruments.

Solution for the given case:-

Calculation of Goodwill
Amount Paid	150,000.00
(-) Net Assets Acquired	77,000.00
Goodwill	73,000.00
	Journal Entry
Recieveable….Dr	20,000.00
Building…Dr	200,000.00
Goodwill…Dr	73,000.00
	To Payables	18,000.00
	To Bonds Payable	125,000.00
	To Cash Paid	150000