(a) The CU2,000,000 asset revaluation surplus represents the amount by which the fair value of Investee's land at the date of the first exchange transaction exceeds its carrying amount; the carrying amount of the land at the date Investor acquired the initial 20 per cent interest was CU6,000,000, but its fair value was CU8,000,000. In accordance with paragraph 58 of IFRS 3, each transaction must be treated separately for the purpose of determining the amount of goodwill on that transaction, using cost and fair value information at the date of each exchange transaction.
Notes
The above consolidation adjustments result in:
(a) Investee's identifiable net assets being stated at their full fair values at the date Investor obtains control of Investee. This means that the 20 per cent minority interest in Investee also is stated at the minority's 20 per cent share of the fair values of Investee's identifiable net assets.
(b) goodwill being recognised from the acquisition date at an amount based on treating each exchange transaction separately and using cost and fair value information at the date of each exchange transaction.
(c) issued equity of CU30,000,000 comprising the issued equity of Investor of CU30,000,000.
(d) an asset revaluation surplus of CU600,000. This amount reflects that part of the increase in the fair value of Investee's identifiable net assets after the acquisition of the initial 20 per cent interest that is attributable to that initial 20 per cent interest [20% ‘ CU3,000,000].
(e) a retained earnings balance of CU1,200,000. This amount reflects the changes in Investee's retained earnings after Investor acquired its initial 20 per cent interest that is attributable to that 20 per cent interest [20% ‘ CU6,000,000].
Therefore, the effect of applying the requirements in IFRS 3 to business combinations involving successive share purchases for which the investment was previously accounted for at fair value with changes in value included in profit or loss is to cause:
• changes in the fair value of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost).
• changes in the investee's retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
Applying IFRS 3 if the investee had previously been accounted for at cost or using the equity method
As discussed above, paragraph 25 of IFRS 3 requires the cost of a business combination involving more than one exchange transaction to be measured as the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (ie the date that each individual investment is recognised in the acquirer's financial statements). Therefore, irrespective of whether the initial 20 per cent investment in Investee is accounted for at cost, by applying the equity method or at fair value, the cost to Investor of the combination is the aggregate of the cost of the initial 20 per cent ownership interest (CU3,500,000) plus the cost of the subsequent 60 per cent ownership interest (CU22,000,000).
In addition, and again irrespective of whether the initial 20 per cent investment in Investee is accounted for at cost, by applying the equity method or at fair value, each transaction must be treated separately for the purpose of determining the amount of goodwill on that transaction, using cost and fair value information at the date of each exchange transaction.
Therefore, the effect of applying IFRS 3 to any business combination involving successive share purchases is to cause:
• any changes in the carrying amount of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost).
• changes in the investee's retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
Consequently, the consolidated financial statements immediately after Investor acquires the additional 60 per cent ownership interest and obtains control of Investee would be the same irrespective of the method used to account for the initial 20 per cent investment in Investee before obtaining control.
Changes in the values assigned to the acquiree's identifiable assets
Completing the initial accounting for a business combination
The following example illustrates the application of the guidance in paragraph 62 of IFRS 3 Business Combinations on completing the initial accounting for a business combination when the acquirer has, at the end of the first period after the combination, accounted for the combination using provisional values. This example does not address the accounting for any income tax effects arising from the adjustments.
IFRS 3 requires the acquirer to account for a business combination using provisional values if the initial accounting for a business combination can be determined only provisionally by the end of the reporting period in which the combination is effected. The acquirer is required to recognise any adjustments to those provisional values as a result of completing the initial accounting:
(a) within twelve months of the acquisition date; and
(b) from the acquisition date. Therefore:
(i) the carrying amount of an identifiable asset, liability or contingent liability that is recognised or adjusted as a result of completing the initial accounting is calculated as if its fair value at the acquisition date had been recognised from that date.
(ii) goodwill or any gain recognised in accordance with paragraph 56 is adjusted from the acquisition date by an amount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent liability being recognised or adjusted.
(iii) comparative information presented for the periods before the initial accounting for the combination is complete is presented as if the initial accounting had been completed from the acquisition date. This includes any additional depreciation, amortisation or other profit or loss effects recognised as a result of completing the initial accounting.
Example 7
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial statements. The entity was the acquirer in a business combination on 30 September 20X4. The entity sought an independent appraisal for an item of property, plant and equipment acquired in the combination. However, the appraisal was not finalised by the time the entity completed its 20X4 annual financial statements. The entity recognised in its 20X4 annual financial statements a provisional fair value for the asset of CU30,000, and a provisional value for acquired goodwill of GUI00,000. The item of property, plant and equipment had a remaining useful life at the acquisition date of five years.
Four months after the acquisition date, the entity received the independent appraisal, which estimated the asset's fair value at the acquisition date at CU40,000.
As outlined in paragraph 62 of IFRS 3, the acquirer is required to recognise any adjustments to provisional values as a result of completing the initial accounting from the acquisition date.
Therefore, in the 20X5 financial statements, an adjustment is made to the opening carrying amount of the item of property, plant and equipment. That adjustment is measured as the fair value adjustment at the acquisition date of CU10,000, less the additional depreciation that would have been recognised had the asset's fair value at the acquisition date been recognised from that date (CU500 for three months' depreciation to 31 December 20X4). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU10,000, and the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
In accordance with paragraph 69 of IFRS 3, the entity discloses in its 20X4 financial statements that the initial accounting for the business combination has been determined only provisionally, and explains why this is the case. In accordance with paragraph 73(b) of IFRS 3, the entity discloses in its 20X5 financial statements the amounts and explanations of the adjustments to the provisional values recognised during the current reporting period. Therefore, the entity discloses that:
• the fair value of the item of property, plant and equipment at the acquisition date has been increased by CU10,000 with a corresponding decrease in goodwill; and
• the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
Error corrections
The following examples illustrate the application of the guidance in paragraphs 63 and 64 of IFRS 3 on the accounting for error corrections related to the initial accounting for a business combination. These examples do not address the accounting for any income tax effects arising from the adjustments.
With three exceptions, IFRS 3 requires adjustments to be made to the initial accounting for a business combination after that initial accounting is complete only to correct an error in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. After that accounting is completed, adjustments cannot be recognised for the effect of changes in accounting estimates.
Two of the three exceptions relate to adjustments to the cost of a business combination after the initial accounting for the combination is complete. The third relates to the subsequent recognition by the acquirer of the acquiree's deferred tax assets that did not satisfy the criteria for separate recognition when initially accounting for the business combination.
In accordance with IAS 8, the effect of a change in an accounting estimate is recognised prospectively. IAS 8 provides guidance on distinguishing corrections of errors from changes in accounting estimates.
Example 8
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial statements. The entity was the acquirer in a business combination on 30 September 20X1. As part of the initial accounting for that combination, the entity recognised goodwill of CU100,000. The carrying amount of goodwill at 31 December 20X1 was GUI 00,000.
During 20X2, the entity becomes aware of an error relating to the amount initially allocated to property, plant and equipment assets acquired in the business combination. In particular, CU20,000 of the CU100,000 initially allocated to goodwill should be allocated to property, plant and equipment assets that had a remaining useful life at the acquisition date of five years.
As outlined in paragraph 64 of IFRS 3, IAS 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 error in the comparative information for the prior period(s) in which it occurred.
Therefore, in the 20X2 financial statements, an adjustment is made to the opening carrying amount of property, plant and equipment assets. That adjustment is measured as the fair value adjustment at the acquisition date of CU20,000 less the amount that would have been recognised as depreciation of the fair value adjustment (CU1,000 for three months' depreciation to 31 December 20X1). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU20,000, and the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
In accordance with IAS 8, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
• the fair value of property, plant and equipment assets at the acquisition date has been increased by CU20,000 with a corresponding decrease in goodwill; and
• the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
Example 9
This example assumes the same facts as in Example 8, except that the amount initially allocated to property, plant and equipment assets is decreased by CU20,000 to correct the error, rather than increased by CU20,000. This example also assumes that the entity determines that the recoverable amount of the additional goodwill is only GUI 7,000 at 31 December 20X1.
In the 20X2 financial statements, the opening carrying amount of property, plant and equipment assets is reduced by CU19,000, being the fair value adjustment at the acquisition date of CU20,000 less GUI ,000 in depreciation expense recognised for the three-month period to 31 December 20X1. The carrying amount of goodwill is increased by GUI 7,000, being the increase in value at the acquisition date of CU20,000 less a CU3,000 impairment loss to reflect that the carrying amount of the adjustment exceeds its recoverable amount. The 20X1 comparative information is restated to reflect this adjustment and to exclude the CU1,000 depreciation and include the CU3,000 impairment loss.
In accordance with IAS 8, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
• the fair value of property, plant and equipment assets at the acquisition date has been decreased by CU20,000 with a corresponding increase in goodwill; and
• the 20X1 comparative information is restated to reflect this adjustment and to exclude CU1,000 depreciation recognised during the year ended 31 December 20X1 and include a CU3,000 impairment loss for goodwill relating to the year ended 31 December 20X1.
