Advanced International Financial Reporting Standards
Lecture 1
E14.1
On 1 July 2016, New Ltd acquired the following assets and liabilities from Day Ltd:
Carrying amount Fair value
Land $300.000 $350.000
Plant (cost $400.000) $280.000 $290.000
Inventory $80.000 $85.000
Cash $15.000 $15.000
Accounts payable ($20.000) ($20.000)
Loans ($80.000) ($80.000)
In exchange for these assets and liabilities, New Ltd issued 100.000 shares that had been
issued for $1,20 per share but at 1 July 2016 had a fair value of $6,50 per share.
Q1. Prepare the journal entries in the records of New Ltd to account for the acquisition of the
assets and liabilities of Day Ltd.
Is this a business combination or an acquisition of standalone assets and liabilities? →
Business combination: a transaction or other event in which an acquirer obtains control
over one or more businesses.
- Transaction? → yes
- Business? → an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return. This is not clear in
this case, but let’s assume it is an integrated set of activities (they get all assets and
liabilities).
- Control? → an investor controls an investee when the investor is exposed, or has
rights, to variable returns from its involvement with the investee and has the ability
to affect those returns through its power over the investee.
Power → existing rights that give the current ability to direct the relevant activities:
* Existing rights; yes, legal ownership of assets and liabilities
* Current ability; they have legal ownership, so also legal rights and practical
ability to exercise the rights (= to determine what to do)
* Relevant activities (= activities of the investee that significantly affect the
investee’s return); yes, given the full ownership rights New can direct the
activities performed with the acquired assets and liabilities
Exposure to variable returns → yes, returns from these assets and liabilities are
variable (not sure what they will generate as revenue).
Ability to use power to affect those returns → yes, they have full ownership so they
are able to use their power to affect those returns (destroy/use/sell plant etc.)
New Ltd has control over Day Ltd.
Let’s assume a business combination has taken place.
Also, the exemptions of IFRS 3 (joint arrangement & common control) do not apply.
Net FV = ($350.000 + $290.000 + $85.000 + $15.000) – ($20.000 + $80.000) = $640.000
Consideration transferred = 100.000 * $6,50 = $650.000
Goodwill = $650.000 – $640.000 = $10.000
1
, Land 350.000
Plant 290.000
Inventory 85.000
Cash 15.000
Goodwill 10.000
Accounts payable 20.000
Loan 80.000
Share capital 120.000 (100.000 * $1,20)
Share premium 530.000 (100.000 * ($6,50-$1,20))
Q2. Prepare the journal entries assuming that the fair value of New Ltd shares was $6 per
share.
Consideration transferred = 100.000 * $6 = $600.000
Gain on bargain purchase (gain in P&L account) = $640.000 - $600.000 = $40.000
Land 350.000
Plant 290.000
Inventory 85.000
Cash 15.000
Accounts payable 20.000
Loan 80.000
Share capital 120.000
Share premium 480.000
Gain on bargain purchase 40.000
E14.2
On 1 January 2016, Desert Ltd acquired all the issued shares of Island Ltd. At this date the
equity of Island Ltd consisted of:
Share capital – 100.000 shares issued at $5 per share $500.000
General reserve $200.000
Asset revaluation surplus $100.000
Retained earnings $50.000
In exchange for these shares, Desert Ltd agreed to pay the former shareholders of Island Ltd
two shares in Desert Ltd, these having a fair value of $4 per share, plus $1,50 cash for each
share held in Island Ltd. The costs of issuing the shares were $800.
Q1. Prepare the journal entries in the records of Desert Ltd to record these events.
Is this a business combination or an acquisition of standalone assets and liabilities? →
Business combination: a transaction or other event in which an acquirer obtains control
over one or more businesses.
- Transaction? → yes
- Business? → an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return. This is not clear in
this case, but let’s assume it is an integrated set of activities.
2
, - Control? → an investor controls an investee when the investor is exposed, or has
rights, to variable returns from its involvement with the investee and has the ability
to affect those returns through its power over the investee.
Power → existing rights that give the current ability to direct the relevant activities:
* Existing rights; yes, 100% of the shares of Island
* Current ability; they have legal ownership, so also legal rights and practical
ability to exercise the rights (= to determine what to do)
* Relevant activities; yes, because Desert acquires 100% of the shares they
can direct the activities performed by Island
Exposure to variable returns → yes, they will get dividends, and they don’t know how
much.
Ability to use power to affect those returns → yes, they have full ownership so they
are able to use their power to affect those returns (destroy/use/sell plant etc.)
Desert Ltd has control over Day Ltd.
Let’s assume a business combination has taken place.
Also, the exemptions of IFRS 3 (joint arrangement & common control) do not apply.
Consideration transferred:
Cash: Shareholders ($1,50 * 100.000) $150.000
Shares: Shareholders (100.000 * 2 * $4) $800.000
Consideration transferred $950.000
Investment in subsidiary 950.000
Share capital 800.000
Cash 150.000
Share capital 800
Cash 800
E14.3
On 1 December 2016, Trout Ltd acquired all the assets and liabilities of Dory Ltd, with Trout
Ltd issuing 100.000 shares to acquire them. The fair values of Dory Ltd’s assets and liabilities
at this date were:
Cash $50.000
Furniture and fittings $20.000
Accounts receivable $5.000
Plant $125.000
Accounts payable $15.000
Current tax liability $8.000
Annual leave payable $2.000
Q1. Prepare the journal entries for Trout Ltd to record the business combination at 1
December 2016, assuming the fair value of each Trout Ltd share at acquisition date is $1,90.
Prepare any note disclosures for Trout Ltd at 31 December 2016 in relation to the business
combination.
3
,Is this a business combination or an acquisition of standalone assets and liabilities? →
Business combination: a transaction or other event in which an acquirer obtains control
over one or more businesses.
- Transaction? → yes
- Business? → an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return. This is not clear in
this case, but let’s assume it is an integrated set of activities (they get all assets and
liabilities).
- Control? → an investor controls an investee when the investor is exposed, or has
rights, to variable returns from its involvement with the investee and has the ability
to affect those returns through its power over the investee.
Power → existing rights that give the current ability to direct the relevant activities:
* Existing rights; yes, legal ownership of assets and liabilities
* Current ability; they have legal ownership, so also legal rights and practical
ability to exercise the rights (= to determine what to do)
* Relevant activities; yes, given the full ownership rights Trout can direct the
activities performed with the acquired assets and liabilities
Exposure to variable returns → yes
Ability to use power to affect those returns → yes, they have full ownership so they
are able to use their power to affect those returns (destroy/use/sell plant etc.)
Trout Ltd has control over Dory Ltd.
Let’s assume a business combination has taken place.
Also, the exemptions of IFRS 3 (joint arrangement & common control) do not apply.
Net FV = ($50.000 + $20.000 + $5.000 + $125.000) – ($15.000 + $8.000 + $2.000) = $175.000
Consideration transferred = 100.000 * $1,90 = $190.000
Goodwill = $190.000 - $175.000 = $15.000
Cash 50.000
Furniture and fittings 20.000
Accounts receivable 5.000
Plant 125.000
Goodwill 15.000
Accounts payable 15.000
Current tax payable 8.000
Annual leave payable 2.000
Share capital 190.000
Q2. Assume the fair value of each Trout Ltd share at acquisition date is $1,90. At acquisition
date, the acquirer could only determine a provisional fair value for the plant. On 1 March
2017, Trout Ltd received the final value from the independent appraisal, the fair value at
acquisition date being $131.000. Assuming the plant had a further 5-year life from the
acquisition date, explain how Trout Ltd will account for the business combination both at
acquisition date and in the financial statements for 2017.
FV net assets will be = $175.000 + ($131.000 - $125.000) = $181.000
Goodwill = $190.000 - $181.000 = $9.000
4
, Plant 6.000
Goodwill 6.000
Depreciation expense booked as of 31/12/2016 = 1/12 * ($125.000/5) = $2.100
Depreciation expense based on FV = 1/12 * ($131.000/5) = $2.200
You can’t use depreciation expenses, because it is related to the year before (2016), and not
to the current year.
Correction of last year
Retained earnings 100
Accumulated depreciation – plant 100
Depreciation expense booked as of 1/3/2016 = 2/12 * ($125.000/5) = $4.200
Depreciation expense based on FV = 2/12 * ($131.000/5) = $4.400
Correction of current year
Depreciation expense 200
Accumulated depreciation – plant 200
Q3. Prepare the journal entries for Trout Ltd to record the business combination at 1
December 2016, assuming the fair value of each Trout Ltd share at acquisition date is $1,70.
Consideration transferred = 100.000 * $1,70 = $170.000
Gain on bargain purchase = $175.000 - $170.000 = $5.000
Cash 50.000
Furniture and fittings 20.000
Accounts receivable 5.000
Plant 125.000
Accounts payable 15.000
Current tax payable 8.000
Annual leave payable 2.000
Share capital 170.000
Gain on bargain purchase 5.000
E14.8
Sweetlip Ltd and Warehou Ltd are two family-owned flax-producing companies in New
Zealand. Sweetlip Ltd is owned by the Wood family and the Bradbury family owns Warehou
Ltd. The Wood family has only one son and he is engaged to be married to the daughter of
the Bradbury family. Because the son is currently managing Warehou Ltd, it is proposed that,
after the wedding, he should manage both companies. As a result, it is agreed by the two
families that Sweetlip Ltd should take over the net assets of Warehou Ltd. The statement of
financial position of Warehou Ltd immediately before the takeover is as follows:
Carrying amount Fair value
Cash 20.000 20.000
Accounts receivable 140.000 125.000
Land 620.000 840.000
Buildings (net) 530.000 550.000
Farm equipment (net) 360.000 364.000
5
, Irrigation equipment (net) 220.000 225.000
Vehicles (net) 160.000 172.000
Accounts payable 80.000 80.000
Loan - Trevally Bank 480.000 480.000
Share capital 670.000
Retained earnings 820.000
The takeover agreement specified the following details:
- Sweetlip Ltd is to acquire all the assets of Warehou Ltd except for cash, and one of the
vehicles (having a carrying amount of $45.000 and a fair value of $48.000), and assume all
the liabilities except for the loan from the Trevally Bank. Warehou Ltd is then to go into
liquidation. The vehicle is to be transferred to Mr and Mrs Bradbury.
- Sweetlip Ltd is to supply sufficient cash to enable the debt to the Trevally Bank to be paid
off and to cover the liquidation costs of $5.500. It will also give $150.000 to be distributed to
Mr and Mrs Bradbury to help pay the costs of the wedding.
- Sweetlip Ltd is also to give a piece of its own prime land to Warehou Ltd to be distributed
to Mr and Mrs Bradbury, this eventually being available to be given to any offspring of the
forthcoming marriage. The piece of land in question has a carrying amount of $80.000 and a
fair value of $220.000.
- Sweetlip Ltd is to issue 100.000 shares, these having a fair value of $14 per share, to be
distributed via Warehou Ltd to the soon-to-be-married-daughter of Mr and Mrs Bradbury,
who is currently a shareholder in Warehou Ltd.
The takeover proceeded as per the agreement, with Sweetlip Ltd incurring incidental
acquisition costs of $25.000 and $18.000 share issue costs.
Q. Prepare the acquisition analysis and the journal entries to record the acquisition of
Warehou Ltd in the records of Sweetlip Ltd.
FV net assets = (125.000 + 840.000 + 550.000 + 364.000 + 225.000 + (172.000 – 48.000)) –
80.000 = $2.148.000
Consideration transferred:
- Shares 100.000 * $14 $1.400.000
- Cash $480.000 + $5.500 + $150.000 - $20.000* $615.500
- Land $220.000
Total $2.235.500
* Sufficient cash to enable Warehou to pay off debt and pay liquidation costs, taking into
account the existing cash in Warehou of $20.000
Goodwill = $2.235.500 - $2.148.000 = $87.500
Re-measurement as part of consideration transferred in a business combination:
Land 140.000 (220.000 – 80.000)
Gain 140.000
Accounts receivable 125.000
Land 840.000
Buildings 550.000
Farm equipment 364.000
6
Lecture 1
E14.1
On 1 July 2016, New Ltd acquired the following assets and liabilities from Day Ltd:
Carrying amount Fair value
Land $300.000 $350.000
Plant (cost $400.000) $280.000 $290.000
Inventory $80.000 $85.000
Cash $15.000 $15.000
Accounts payable ($20.000) ($20.000)
Loans ($80.000) ($80.000)
In exchange for these assets and liabilities, New Ltd issued 100.000 shares that had been
issued for $1,20 per share but at 1 July 2016 had a fair value of $6,50 per share.
Q1. Prepare the journal entries in the records of New Ltd to account for the acquisition of the
assets and liabilities of Day Ltd.
Is this a business combination or an acquisition of standalone assets and liabilities? →
Business combination: a transaction or other event in which an acquirer obtains control
over one or more businesses.
- Transaction? → yes
- Business? → an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return. This is not clear in
this case, but let’s assume it is an integrated set of activities (they get all assets and
liabilities).
- Control? → an investor controls an investee when the investor is exposed, or has
rights, to variable returns from its involvement with the investee and has the ability
to affect those returns through its power over the investee.
Power → existing rights that give the current ability to direct the relevant activities:
* Existing rights; yes, legal ownership of assets and liabilities
* Current ability; they have legal ownership, so also legal rights and practical
ability to exercise the rights (= to determine what to do)
* Relevant activities (= activities of the investee that significantly affect the
investee’s return); yes, given the full ownership rights New can direct the
activities performed with the acquired assets and liabilities
Exposure to variable returns → yes, returns from these assets and liabilities are
variable (not sure what they will generate as revenue).
Ability to use power to affect those returns → yes, they have full ownership so they
are able to use their power to affect those returns (destroy/use/sell plant etc.)
New Ltd has control over Day Ltd.
Let’s assume a business combination has taken place.
Also, the exemptions of IFRS 3 (joint arrangement & common control) do not apply.
Net FV = ($350.000 + $290.000 + $85.000 + $15.000) – ($20.000 + $80.000) = $640.000
Consideration transferred = 100.000 * $6,50 = $650.000
Goodwill = $650.000 – $640.000 = $10.000
1
, Land 350.000
Plant 290.000
Inventory 85.000
Cash 15.000
Goodwill 10.000
Accounts payable 20.000
Loan 80.000
Share capital 120.000 (100.000 * $1,20)
Share premium 530.000 (100.000 * ($6,50-$1,20))
Q2. Prepare the journal entries assuming that the fair value of New Ltd shares was $6 per
share.
Consideration transferred = 100.000 * $6 = $600.000
Gain on bargain purchase (gain in P&L account) = $640.000 - $600.000 = $40.000
Land 350.000
Plant 290.000
Inventory 85.000
Cash 15.000
Accounts payable 20.000
Loan 80.000
Share capital 120.000
Share premium 480.000
Gain on bargain purchase 40.000
E14.2
On 1 January 2016, Desert Ltd acquired all the issued shares of Island Ltd. At this date the
equity of Island Ltd consisted of:
Share capital – 100.000 shares issued at $5 per share $500.000
General reserve $200.000
Asset revaluation surplus $100.000
Retained earnings $50.000
In exchange for these shares, Desert Ltd agreed to pay the former shareholders of Island Ltd
two shares in Desert Ltd, these having a fair value of $4 per share, plus $1,50 cash for each
share held in Island Ltd. The costs of issuing the shares were $800.
Q1. Prepare the journal entries in the records of Desert Ltd to record these events.
Is this a business combination or an acquisition of standalone assets and liabilities? →
Business combination: a transaction or other event in which an acquirer obtains control
over one or more businesses.
- Transaction? → yes
- Business? → an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return. This is not clear in
this case, but let’s assume it is an integrated set of activities.
2
, - Control? → an investor controls an investee when the investor is exposed, or has
rights, to variable returns from its involvement with the investee and has the ability
to affect those returns through its power over the investee.
Power → existing rights that give the current ability to direct the relevant activities:
* Existing rights; yes, 100% of the shares of Island
* Current ability; they have legal ownership, so also legal rights and practical
ability to exercise the rights (= to determine what to do)
* Relevant activities; yes, because Desert acquires 100% of the shares they
can direct the activities performed by Island
Exposure to variable returns → yes, they will get dividends, and they don’t know how
much.
Ability to use power to affect those returns → yes, they have full ownership so they
are able to use their power to affect those returns (destroy/use/sell plant etc.)
Desert Ltd has control over Day Ltd.
Let’s assume a business combination has taken place.
Also, the exemptions of IFRS 3 (joint arrangement & common control) do not apply.
Consideration transferred:
Cash: Shareholders ($1,50 * 100.000) $150.000
Shares: Shareholders (100.000 * 2 * $4) $800.000
Consideration transferred $950.000
Investment in subsidiary 950.000
Share capital 800.000
Cash 150.000
Share capital 800
Cash 800
E14.3
On 1 December 2016, Trout Ltd acquired all the assets and liabilities of Dory Ltd, with Trout
Ltd issuing 100.000 shares to acquire them. The fair values of Dory Ltd’s assets and liabilities
at this date were:
Cash $50.000
Furniture and fittings $20.000
Accounts receivable $5.000
Plant $125.000
Accounts payable $15.000
Current tax liability $8.000
Annual leave payable $2.000
Q1. Prepare the journal entries for Trout Ltd to record the business combination at 1
December 2016, assuming the fair value of each Trout Ltd share at acquisition date is $1,90.
Prepare any note disclosures for Trout Ltd at 31 December 2016 in relation to the business
combination.
3
,Is this a business combination or an acquisition of standalone assets and liabilities? →
Business combination: a transaction or other event in which an acquirer obtains control
over one or more businesses.
- Transaction? → yes
- Business? → an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return. This is not clear in
this case, but let’s assume it is an integrated set of activities (they get all assets and
liabilities).
- Control? → an investor controls an investee when the investor is exposed, or has
rights, to variable returns from its involvement with the investee and has the ability
to affect those returns through its power over the investee.
Power → existing rights that give the current ability to direct the relevant activities:
* Existing rights; yes, legal ownership of assets and liabilities
* Current ability; they have legal ownership, so also legal rights and practical
ability to exercise the rights (= to determine what to do)
* Relevant activities; yes, given the full ownership rights Trout can direct the
activities performed with the acquired assets and liabilities
Exposure to variable returns → yes
Ability to use power to affect those returns → yes, they have full ownership so they
are able to use their power to affect those returns (destroy/use/sell plant etc.)
Trout Ltd has control over Dory Ltd.
Let’s assume a business combination has taken place.
Also, the exemptions of IFRS 3 (joint arrangement & common control) do not apply.
Net FV = ($50.000 + $20.000 + $5.000 + $125.000) – ($15.000 + $8.000 + $2.000) = $175.000
Consideration transferred = 100.000 * $1,90 = $190.000
Goodwill = $190.000 - $175.000 = $15.000
Cash 50.000
Furniture and fittings 20.000
Accounts receivable 5.000
Plant 125.000
Goodwill 15.000
Accounts payable 15.000
Current tax payable 8.000
Annual leave payable 2.000
Share capital 190.000
Q2. Assume the fair value of each Trout Ltd share at acquisition date is $1,90. At acquisition
date, the acquirer could only determine a provisional fair value for the plant. On 1 March
2017, Trout Ltd received the final value from the independent appraisal, the fair value at
acquisition date being $131.000. Assuming the plant had a further 5-year life from the
acquisition date, explain how Trout Ltd will account for the business combination both at
acquisition date and in the financial statements for 2017.
FV net assets will be = $175.000 + ($131.000 - $125.000) = $181.000
Goodwill = $190.000 - $181.000 = $9.000
4
, Plant 6.000
Goodwill 6.000
Depreciation expense booked as of 31/12/2016 = 1/12 * ($125.000/5) = $2.100
Depreciation expense based on FV = 1/12 * ($131.000/5) = $2.200
You can’t use depreciation expenses, because it is related to the year before (2016), and not
to the current year.
Correction of last year
Retained earnings 100
Accumulated depreciation – plant 100
Depreciation expense booked as of 1/3/2016 = 2/12 * ($125.000/5) = $4.200
Depreciation expense based on FV = 2/12 * ($131.000/5) = $4.400
Correction of current year
Depreciation expense 200
Accumulated depreciation – plant 200
Q3. Prepare the journal entries for Trout Ltd to record the business combination at 1
December 2016, assuming the fair value of each Trout Ltd share at acquisition date is $1,70.
Consideration transferred = 100.000 * $1,70 = $170.000
Gain on bargain purchase = $175.000 - $170.000 = $5.000
Cash 50.000
Furniture and fittings 20.000
Accounts receivable 5.000
Plant 125.000
Accounts payable 15.000
Current tax payable 8.000
Annual leave payable 2.000
Share capital 170.000
Gain on bargain purchase 5.000
E14.8
Sweetlip Ltd and Warehou Ltd are two family-owned flax-producing companies in New
Zealand. Sweetlip Ltd is owned by the Wood family and the Bradbury family owns Warehou
Ltd. The Wood family has only one son and he is engaged to be married to the daughter of
the Bradbury family. Because the son is currently managing Warehou Ltd, it is proposed that,
after the wedding, he should manage both companies. As a result, it is agreed by the two
families that Sweetlip Ltd should take over the net assets of Warehou Ltd. The statement of
financial position of Warehou Ltd immediately before the takeover is as follows:
Carrying amount Fair value
Cash 20.000 20.000
Accounts receivable 140.000 125.000
Land 620.000 840.000
Buildings (net) 530.000 550.000
Farm equipment (net) 360.000 364.000
5
, Irrigation equipment (net) 220.000 225.000
Vehicles (net) 160.000 172.000
Accounts payable 80.000 80.000
Loan - Trevally Bank 480.000 480.000
Share capital 670.000
Retained earnings 820.000
The takeover agreement specified the following details:
- Sweetlip Ltd is to acquire all the assets of Warehou Ltd except for cash, and one of the
vehicles (having a carrying amount of $45.000 and a fair value of $48.000), and assume all
the liabilities except for the loan from the Trevally Bank. Warehou Ltd is then to go into
liquidation. The vehicle is to be transferred to Mr and Mrs Bradbury.
- Sweetlip Ltd is to supply sufficient cash to enable the debt to the Trevally Bank to be paid
off and to cover the liquidation costs of $5.500. It will also give $150.000 to be distributed to
Mr and Mrs Bradbury to help pay the costs of the wedding.
- Sweetlip Ltd is also to give a piece of its own prime land to Warehou Ltd to be distributed
to Mr and Mrs Bradbury, this eventually being available to be given to any offspring of the
forthcoming marriage. The piece of land in question has a carrying amount of $80.000 and a
fair value of $220.000.
- Sweetlip Ltd is to issue 100.000 shares, these having a fair value of $14 per share, to be
distributed via Warehou Ltd to the soon-to-be-married-daughter of Mr and Mrs Bradbury,
who is currently a shareholder in Warehou Ltd.
The takeover proceeded as per the agreement, with Sweetlip Ltd incurring incidental
acquisition costs of $25.000 and $18.000 share issue costs.
Q. Prepare the acquisition analysis and the journal entries to record the acquisition of
Warehou Ltd in the records of Sweetlip Ltd.
FV net assets = (125.000 + 840.000 + 550.000 + 364.000 + 225.000 + (172.000 – 48.000)) –
80.000 = $2.148.000
Consideration transferred:
- Shares 100.000 * $14 $1.400.000
- Cash $480.000 + $5.500 + $150.000 - $20.000* $615.500
- Land $220.000
Total $2.235.500
* Sufficient cash to enable Warehou to pay off debt and pay liquidation costs, taking into
account the existing cash in Warehou of $20.000
Goodwill = $2.235.500 - $2.148.000 = $87.500
Re-measurement as part of consideration transferred in a business combination:
Land 140.000 (220.000 – 80.000)
Gain 140.000
Accounts receivable 125.000
Land 840.000
Buildings 550.000
Farm equipment 364.000
6
