IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Chapter 35 / Business Combinations (IFRS 3)

Additionally, JCE requested an official valuation of the computer equipment of LZE. By the time of the 20X5 annual financial statements, the valuation had not been completed and a provisional value for the assets was included in the financial statements. The final valuation was received on June 30, 20X6. On March I, 20X7, the auditors discover an error in the valuation of property , plant, and equipment as at December 31, 20X5. A piece of equipment had been omitted from the valuation listing. Required Describe the implications of the preceding information for accounting for the acquisition of LZE. Solution The customer lists meet the definition of an intangible asset and should be accounted for separately. However, the customer list that is subject to national laws regarding confidentiality would not meet the criteria for an intangible asset, as the laws would prevent the entity from disseminating the information about its customers. The contract-based intangibles-the contracts for the supply of maintenance services-would meet the definition of an intangible asset. These intangibles will be recognized separately from goodwill , provided that the fair value can be measured reliably. In deciding on the fair value of a customer relationship, for example, JCE will consider assumptions such as the expected renewal of the supply agreement. The insurance contracts that it already has with its customers meet the contractual legal criterion for identification as an intangible asset and will be recognized separately from goodwill, providing the fair value can be measured reliably. In determining the fair value of the liability relating to these insurance contracts , the holding company will bear in mind potential estimates of cancellations by policyholders. Currently IFRS 4, Insurance Contracts, deals with the accounting for such contracts. Also, the number of policyholders that are expected to renew their contracts each year must be borne in mind when assessing the accounting for these contracts. Regarding the computer equipment that has been acquired, at year-end the entity has not determined the value of this equipment. Therefore, a provisional value will be placed on the computer equipment. Any adjustment to this provisional value will be made from the acquisition date and have to be made within 12 months of that acquisition date. The valuation was received on June 30; as a result, goodwill at December 31, 2005, will be recalculated. In the 2006 accounts, an adjustment will be made to the opening carrying value of the computer equipment less any depreciation for the period. The carrying value of goodwill will be adjusted for the reduction in value at the acquisition date, and the 2005 comparative information will be restated to reflect the adjustment. In the 2005 accounts, the financial statements should disclose that the initial accounting for the business combination has been determined only provisionally and explain why this is so. In the 2006 accounts, there should be an explanation of what adjustments have been made to the provisional values during the period . The error in 2007, regarding the omission of a piece of plant and equipment, should be accounted for under lAS 8. lAS 8 requires the correction of an error to be accounted for retrospectively and for the financial statements to be presented as if the error had never occurred by correcting the prior period's information. In the 2007 financial statements, an adjustment will be made to the opening value of property, plant, and equipment. The adjustment will be the fair value of the equipment at December 31, 2005, less any amounts that should have been recognized for the depreciation of that equipment. The carrying value of goodwill is also adjusted for the reduction in value. Also, the comparative information for the year to December 31, 2006, will be restated, and any additional depreciation relating to that period will be charged. 9. DISCLOSURES For each business combination, this information should be disclosed: (1) Names and descriptions of the combining entities (2) The acquisition date (3) The percentage of voting equity instruments acquired (4) The cost of the combination and a description of the components of that cost (5) Amounts recognized at the acquisition date for each class of the acquiree's assets, liabili– ties, and contingent liabilities and the carrying amounts of each of those classes immedi– ately before the acquisition unless that is impracticable (6) The amount of any negative goodwill that has been shown in the income statement (7) The factors that contributed to the recognition of goodwill