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MODULE 5Business combinations and group accounting Purchase accounting requires an acquirer and an acquiree to be identified for every business combinations. Where a new entity (H) is created to acquire two pre-existing entities, S and A, which of these entities will be designated as the acquirer? (...

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Module 5 MODULE 5 Business combinations and group accounting

1. Purchase accounting requires an acquirer and an acquiree to be identified for every business combinations. Where a new entity (H) is created to acquire two pre-existing entities, S and A, which of these entities will be designated as the acquirer? (a) H. (b) S. (c) A. (d) A or S. (IFRS 3, 6) 2. IFRS 3 requires all identifiable intangible assets of the acquired business to be recorded at their fair values. Many intangible assets that may have been subsumed within goodwill must be now separately valued and identified. Under IFRS 3, when would an intangible asset be “identifiable”? (a) When it meets the definition of an asset in the Framework document only. (IFRS 3, 11) (b) When it meets the definition of an intangible asset in IAS 38, Intangible Assets, and its fair value can be measured reliably. (c) If it has been recognized under local generally accepted accounting principles even though it does not meet the definition in IAS 38. (d) Where it has been acquired in a business combination. 3. An acquirer should at the acquisition date recognize goodwill acquired in a business combination as an asset. Goodwill should be accounted for as follows: (a) Recognize as an intangible asset and amortize over its useful life. (b) Write off against retained earnings. (c) Recognize as an intangible asset and impairment test when a trigger event occurs. (d) Recognize as an asset and annually impairment test (or more frequently if impairment is indicated). (IRFS 3, 32 & IAS 36, 10b) 4. The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities, and contingent liabilities over cost” (formerly known as negative goodwill) should be (a) Amortized over the life of the assets acquired. (b) Reassessed as to the accuracy of its measurement and then recognized immediately in profit or loss. (IFRS 3, 36) (c) Reassessed as to the accuracy of its measurement and then recognized in retained earnings. (d) Carried as a capital reserve indefinitely. 5. Corin, a private limited company, has acquired 100% of Coal, a private limited company, on January 1, 2005. The fair value of the purchase consideration was $10 million ordinary shares of $1 of Corin, and the fair value of the net assets acquired was $7 million. At the time of the acquisition, the value of the ordinary shares of Corin and the net assets of Coal were only provisionally determined. The value of the shares of Corin ($11 million) and the net assets of Coal ($7.5 million) on January 1, 2005, were finally determined on November 30, 2005. However, the directors of Corin have seen the value of the company decline since January 1, 2005, and as of February 1, 2006, wish to change the value of the purchase consideration to $9 million. What value should be placed on the purchase consideration and net assets of Coal as at the date of acquisition? 1

Module 5 (a) Purchase consideration $10 million, net asset value $7 million. (b) Purchase consideration $11 million, net asset value $7.5 million. ((IFRS 3, 10 & 18) (c) Purchase consideration $9 million, net asset value $7.5 million. (d) Purchase consideration $11 million, net asset value $7 million. 6. How is goodwill arising on the acquisition of an associate dealt with in the financial statements? (a) It is amortized. (b) It is impairment tested individually. (c) It is written off against profit or loss. (d) Goodwill is not recognized separately within the carrying amount of the investment (IAS 28, 32a) 7. What should happen when the financial statements of an associate are not prepared to the same date as the investor’s accounts? (a) The associate should prepare financial statements for the use of the investor at the same date as those of the investor. (IAS 28, 33) (b) The financial statements of the associate prepared up to a different accounting date will be used as normal. (c) Any major transactions between the date of the financial statements of the investor and that of the associate should be accounted for. (d) As long as the gap is not greater than three months, there is no problem. 8. If the investor ceases to have significant influence over an associate, how should the investment be treated? (a) It should still be treated using equity accounting. (b) It should be treated in accordance with IFRS 9. (c) The investment should be frozen at the date at which the investor ceases to have significant influence. (d) The investment should be treated at cost. 9. If there is any excess of the investor’s share of the net fair value of the associate’s identifiable assets and contingent liabilities over the cost of the investment, that is, negative goodwill, how should that excess be treated? (a) It should be included in the carrying amount of the investment. (b) It should be written off against retained earnings. (c) It should be included as income in the determination of the investor’s share of the associate’s profit or loss for the period. (IAS 28, 32) (d) It should be disclosed separately as part of the investor’s equity. 10. What accounting method should be used for an investment in an associate where it is operating under severe long-term restrictions—for example where the government of a company has temporary control over the associate? (a) IFRS 9 should be applied. (b) The equity method should be applied if significant influence can be exerted. (IAS 28, 16) (c) The associate should be shown at cost. (d) Proportionate consolidation should be used. 11. An investor sells inventory for cash to a 25% associate. The inventory cost the investor $6 million and is sold to the associate for $10 million. None of the inventory has been sold at year-end. How much of the profit on the transaction would be reported in the group accounts? (a) $4 million 2

Module 5 (b) $1 million (c) $3 million (only group share of unrealised profit/loss require elimination) (d) Zero. 12. A joint venture is exempt from using the equity method or proportionate consolidation in certain circumstances. Which of the following circumstances is not a legitimate reason for not using the equity method or proportionate consolidation? (a) Where the interest is held for sale under IFRS 5. (IAS 27, 10) (b) Where the exception in IAS 27 applies regarding an entity not being required to present consolidated financial statements. (IFRS 11, 26) (c) Where the venturer is wholly owned, is not a publicly traded entity and does not intend to be, the ultimate parent produces consolidated accounts, and the owners do not object to the nonusage of the accounting methods. (IAS 27, 4) (d) Where the joint venture’s activities are dissimilar from those of the parent. (not in the standards) 13. In the case of a jointly controlled operation, a venturer should account for its interest by (a) Using the equity method or proportionate consolidation. (b) Recognizing the assets and liabilities, expenses and income that relate to its interest in the joint venture. (IFRS 11, 20) (c) Showing its share of the assets that it jointly controls, any liabilities incurred jointly or severally, and any income or expense relating to its interest in the joint venture. (d) Using the purchase method of accounting. 14. In the case of jointly controlled assets, a venturer should account for its interest by (a) Using the equity method or proportionate consolidation. (b) Recognizing the assets and liabilities, expenses and income that relate to its interest in the joint venture. (IFRS 11, 20) (c) Showing its share of the assets that it jointly controls, any liabilities incurred jointly or severally, and any income or expense relating to its interest in the joint venture. (d) Using the purchase method of accounting. 15. In the case of jointly controlled entities, a venturer should account for its interest by (a) Using the equity method or proportionate consolidation. (IFRS 11, 24) (b) Recognizing the assets and liabilities, expenses and income that relate to its interest in the joint venture. (c) Showing its share of the assets that it jointly controls, any liabilities incurred jointly or severally, and any income or expense relating to its interest in the joint venture. (d) Using the purchase method of accounting. 16. The exemption from applying the equity method or proportionate consolidation is available in the following circumstances: (a) Where severe long-term restrictions impair the ability to transfer funds to the investor. (b) Where the interest is acquired with a view to resale within twelve months. (IAS 28, 20) (c) Where the activities of the venturer and joint venture are dissimilar. (d) Where the venturer does not exert significant influence. 17. Under proportionate consolidation, the minority interest in the venture is (a) Shown as a deduction from the net assets. (b) Shown in the equity of the venturer. (c) Shown as part of long-term liabilities of the venturer. (d) Not included in the financial statements of the venturer. (IAS 27, 10; IFRS 11, 24) 3

Module 5

Answer: C

Answer: A 4

Module 5

Answer: B

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Module 5

Answers: Q5.22 C; Q5.23 C

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