421 / 488
Chapter
35 /
Business Combinations (IFRS 3)
409
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