416 / 488
404
Wiley IFRS: Practical Implementation Guide and Workbook
4. COST OF ACQUISITION
4.1 The cost of the acquisition has to be measured.
It
is the sum of the fair values of the assets
given or liabilities incurred at the date of the acquisition plus the equity shares issued by the ac–
quirer in exchange for control of the acquiree plus any costs that are direct ly related to the business
combination. Equity shares issued as consideratio n for the acquisitio n of the other entity will be
valued at their market price. If a market price is not in existence or canno t be reliably determined,
then other valuation methods can be used.
4.2 Future losses or other costs that are expected to be incurred as a result of the business combi–
nation are not deemed to be liabilities incurred by the acquirer and are, therefore, not included as
part of the cost of the acquisition.
4.3 Any directly attributable costs, such as professional fees paid to accountants or legal advisers,
should be included as part of the cost of acquisition. General administrative costs and other costs
that cannot be directly attributed to the business combination should not be included but expensed.
Similarly, costs of issuing equity instruments shall not be included in the costs of the business
combination. Such costs should reduce the proceeds from the equity issue (lAS 32).
4.4 The cost of the business combination could be subjec t to adjustment because it may be con–
tingent on certain future events. The amount of that adjustment should be included in the cost of
the business combination if the adj ustment is probable and can be measured reliably. Such an ad–
justment might be, for example, where the cost is contingent on a specified level of profit being
maint ained or achieved in future or on the market price of the equity shares that are issued being
maintained. If, however, the contingent payment is either not probable or not capable of being
measured reliably, it is not included as part of the initial cost of the business combination. When
the amount subsequently becomes probable and can be measured reliably, the additional consid–
eration can be treated as an adjustment to the cost of acquisition.
Practical Insight
Newmar k Security pIc acquired a subsidiary in the year to April 30, 2003. The company paid
an initial amount with a further sum, not exceedi ng $3.5 million, being due over the next four
years. The deferred considera tion is payable subject to the subsidiary achieving an agreed
level of average profit over the period. Newmark felt that it would be payable in full and,
therefore, included the additional amount in the initial cost of acquisition.
5. NET ASSETS ACQUIRED
5.1 The acquirer must recognize separately at the date of acquisition the acquiree's identifiable
assets, liabilities, and contingent liabilit ies that satisfy the recognit ion criteria at that date set out in
the IFRS. These net assets must be recognized irrespective of whether they have previously been
recognized in the acquiree's financial statements. The criteria used are
• Assets other than intangible assets must be recognized if it is probable that the future eco–
nomic benefits will go to the acquirer and their fair value can be measured reliably.
• A liability other than a contingent liability must be recognized if it is probable that there will
be an outflow of resources required to settle the obligation and the fair value can be mea–
sured reliably .
• A contingent liability or an intangible asset must be recogni zed if its fair value can be recog-
nized reliably.
5.2 Any minority interest is stated at the minority' s proportion of the net fair value of the above
items.
5.3 Any agreed restructuring provisions would generally not be recognized unless the acquiree
has at the acquisition date an existing liability for restructuring that has been recognized in accor–
dance with lAS 37. Identifiable assets, liabilities, and contingent liabilities must be measured ini–
tially at full fair value, which includes any minority interest share of those items. The acquirer
should not recognize any liabilities for future losses or other costs expected to be incurred as a re-