431 / 488
Chapter
35 /
Business Combinations (IFRS 3)
419
Goodwill
4
S.
2
initial pur-
At January 1, 2004: cost $10 million –
30% of $20 million
=
At January I, 2005: cost $15 million –
40% of $25 million
=
(Entity A ha s not accounted for the
chase as an associate.)
14. Corin, a private limited company, has acquired
100% of Coa l, a private limited company, on Janu–
ary I, 2005. The fair value of the purchase
consideration was $10 million ordinary shares of $ 1
of Corin, and the fair value of the net assets acquired
was $7 million. At the time of the acquisition, the
value of the ordinary shares of Cori n and the net
assets of Coal were only provisionally determined.
The value of the shares of Corin ($11 million) and the
net assets of Coal ($7.5 million) on January 1, 2005,
were finally determined on November 30, 2005.
However, the directors of Corin have seen the value
of the compa ny decl ine since January I, 2005, and as
of February I, 2006, wish to cha nge the value of the
purchase consideration to $9 million. What value
(b)
Decrease the value attrib uted to goodw ill,
thus increasing the risk of impairment of
goodwill.
(c) Increase the value attributed to goodwill,
thus decreasing the risk of impairme nt of
goodwill.
(d) Increase the value attributed to goodw ill,
thus increasing the risk of impairment of
goodwill.
Answer: (d)
12. IFRS 3 is mandatory for all new acqui sitions
from March 31, 2004. Entities have to cease the am–
ortization of goodw ill arising from previous acquisi–
tions. The balance of goodwill arising from those
acquisitions is
(a) Written off against retai ned earnings.
(b) Written off against profit or loss for the year.
(c) Tested for impairmen t from the beginning of
the next accounting year .
(d) Tested for impairment on March 3 1, 2004.
Answe r: (c)
13. Entity A purchases 30% of the ordinary share
capital of Entity B for $10 million on January I, 2004.
The fair value of the assets of Entity B at that date
was $20 million. On January I, 2005 , Entity A pur–
chases a further 40% of Entity B for $ I5 million,
when the fair value of Entity B' s assets was $25 mil–
lion. On January I, 2004, Entity A does not have sig–
nificant influence over Entity B. What value would be
recognized for goodwill (before any impairment test)
in the conso lidated financia l statements of A for the
year ended December 3 I, 2005 ?
(a) $ 11 million.
(b) $7.5 million.
(c) $9 million.
(d) $ 14 million.
Answer: (c)
(b) All acquisitions from the date of the earliest.
(c) Only those acquisitions since the issue of the
IFRS 3 and lAS 22,
Business Combinations,
to the earlier ones.
(d) Only past and present acquisitions of entities
that have previously and currently prepared
their financial statements using IFRS.
Answer: (b)
10. The management of an entity is unsure how to
treat a restructuring provision that they wish to set up
on the acquisition of another entity. Under IFRS 3,
the treatment of this provision will be
(a) A charge in the income statement in the
postacquisition period.
(b) To include the provision in the allocated
cost of acquisition.
(c) To provide for the amount and, if the provi–
sion is overstated, to release the excess to
the income statement in the postacquisition
period.
(d) To include the provision in the allocated
cost of acquisition if the acquired entity
commits itself to a restructuring within a
year of acquisition.
Answer: (a)
11. IFRS 3 requires that the continge nt liabilities of
the acquired entity should be recognized in the bal–
ance sheet at fair value. The existence of contingent
liabilities is often reflected in a lower purchase price.
Recognition of such contingent liabilities will
(a) Decrease the value attributed to goodwi ll,
thus decreasing the risk of impairme nt of
goodwill.
8. The "excess of the acquirer's interest in the net
fair value of acquiree's identifiable assets, liabilities,
and conti ngent liabilities over cost" (formerly known
as negative goodwill) should be
(a) Amortized over the life of the assets ac–
quired.
(b) Reassessed as to the accuracy of its mea–
surement and then recognized immediately
in profit or loss.
(c) Reassessed as to the accuracy of its mea–
surement and then recognized in retained
earnings.
(d) Carried as a capital reserve indefinitely.
Answer: (b)
9. Which one of the following reasons would not
contribute to the creatio n of negative goodwi ll?
(a) Errors in measuring the fair value of the ac–
quirec' s net identifiable assets or the cost of
the business combination .
(b) A bargain purchase.
(c) A requirement in an IFRS to measure net as–
sets acquired at a value other than fair value.
(d) Making acquisitions at the top of a "bull"
market for shares.
Answer : (d)