IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Chapter 35 / Business Combinations (IFRS 3)

(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 ?

(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) 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) 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 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. cost of acquisition if the acquired entity commits itself to a restructuring within a year of acquisition.

(a) $ 11 million. (b) $7.5 million. (c) $9 million. (d) $ 14 million.

Answer: (c)

Goodwill

At January 1, 2004: cost $10 million – 30% of $20 million = At January I, 2005: cost $15 million – 40% of $25 million =

4

S. 2 initial pur-

(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