IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 35 / Business Combinations (lFRS 3)

407

Mactire $m 170 75

Hand $m 80

Property, plant, and equipment Investment in Hand Current assets

.ss 300 120 170 .io 300

-.AU 120 20 80 20 120

Issuedequity of $1 each Retained earnings Current liabilities

There had been no new share capital issued since the acquisition of Hand by Mactire. The excess of the fair value over the carrying value of Hand's net assets is due to nondepreciable land ($6 million at July I, 20X4, $10 million at December 31, 20X5). Mactire did not exercise significant influence over Hand when only holding a 25% share of the equity. Mactire feels that the total recoverable value of goodwill relating to Hand at December 31, 20X5 , is $8 million , Required (a) Show the accounting for the initial investment in Hand by Mactire before obtaining control. (b) Show the accounting for the business combination as at December 31, 20X5. Solution Initial Accounting for Investment in Hand Initial measurement of investment in Hand is $20 million. At December 31, 20X4, the share price of Hand is $4 per share, It is remeasured to 5 million shares x $5, or $25 million, The increase of $5 million is shown in profitlloss for the period. Accounting for the Business Combination Even though the value of the initial investment has changed, the cost of the initial transactions is used to calculate goodwill on the acquisition. July 1, 20X4 $m July 1, 20X5 $m _5_ Goodwill is, therefore, $5.5 million. Goodwill is estimated to be $8 million at December 31, 20X5 x 75% interest, or $6 million. Therefore, goodwill is not impaired. Consolidation Adjustments (a) Property, plant , and equipment will increase by the excess of the fair value over the carrying value of the net assets, that is, $10 million. (b) Minority interest is Purchase consideration Less net assets acquired: 25% fair value (60) 45%of fair value (110) 20 (15) 50

$m 6 24

Minority interest:

Equity 30% of 20 Retainedearnings 30% of 80 Revaluation (above)

--1 33 (c) The retained earnings of Mactire will be reduced by the increase in the value of the investment in Hand when it was an associate, that is, $5 million. (d) Retained earnings of the group will be

$m

Retained earnings-Mactire less increase in fair value of investment Postacquisition reserves of Hand Preacquisition reserves (e) Preacquisition reserves (45%of 80) Minority interest

170

(5)

80

(8.5)

(36) (24)