ACCT 2202 · Business Combinations · IFRS 3

Led by Fra Luca de Pacioli Simulacrum

1. Module 2 ○ Open

   Business Combinations · IFRS 3

   Led by Fra Luca de Pacioli Simulacrum

   The question

   Business combinations under IFRS 3 — the accounting for the acquisition of a subsidiary. The module covers the four steps of the acquisition method (identify acquirer, determine acquisition date, recognise and measure identifiable assets and liabilities at fair value, recognise goodwill or bargain purchase) and the recurring areas of judgement: separation of intangibles from goodwill, contingent consideration, step acquisitions, and the measurement-period adjustments. The worked scenario takes a step acquisition from 35% associate to 100% subsidiary including the gain on the previously-held interest.

   Outcome

   The student can perform an IFRS 3 business combination calculation including identification of intangibles, can choose between the two NCI measurement methods and articulate the trade-off, and can prepare the disclosure note for the acquired business. (IFRS 3 business combinations)

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   Practice scenarios

   Halberd Industries Acquires Lance Manufacturing

   You work the acquisition accounting for Halberd plc's purchase of Lance Manufacturing — a step acquisition from 35% associate to 100% subsidiary — including the deemed disposal of the previously-held interest, the identification of customer-relationship intangibles, and the calculation of goodwill at acquisition date. The work tests the four-step IFRS 3 acquisition method end-to-end with judgemental edges around fair value and intangibles.

   Your goals

   • Calculate consideration transferred: £42m cash + £6m contingent consideration = £48m.
   • Add fair value of previously held 35% at acquisition date: £18m.
   • Total: £48m + £18m = £66m.
   • Calculate fair value of identifiable net assets: £28m tangible + £12m customer relationships + £8m brand − £5m deferred tax = £43m.
   • Calculate goodwill: £66m − £43m = £23m.
   • Recognise the gain on previously held interest: £18m FV − £14m book value = £4m gain in profit and loss for the period (the *step acquisition* gain).
   • Identify the post-acquisition expenses: amortisation of customer relationships at £12m / 5 years = £2.4m/year (3 months in 2024 = £0.6m); brand name not amortised (indefinite life) but tested for impairment.
   • Frame the journal entries and the disclosure note that will appear in Halberd's 2024 annual report.

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