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Chapter
35 /
Business Combinations (lFRS 3)
407
Property, plant, and equipment
Investment in Hand
Current assets
Issuedequity of $1 each
Retained earnings
Current liabilities
Mactire
$m
170
75
.ss
300
120
170
.io
300
Hand
$m
80
-.AU
120
20
80
20
120
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
Purchase consideration
Less net assets acquired:
25% fair value (60)
45%of fair value (110)
20
(15)
50
_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
Equity 30% of 20
Retainedearnings 30% of 80
Revaluation (above)
Minority interest:
$m
6
24
--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
Retained earnings-Mactire
less increase in fair value of investment
Postacquisition reserves of Hand
Preacquisition reserves (e)
Preacquisition reserves (45%of 80)
Minority interest
80
(8.5)
(36)
(24)
$m
170
(5)