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Dear Mike,
I have watched your P2 lecturers. Thank you so much for your generous sharing and they are really helpful to understand lots of difficult subjects.
In the OT notes, chapter 1, example 3, there is an adjustment for the change of the value of contingent consideration, which is $600,000 when the profit is $200,000 higher than estimated.
The adjustment is Dr cost of investment & Cr Liability. I understand that the adjustment is required if the changes happen within 12-month measurement adjustment period after the date of acquisition.
Please could you kindly help to clarify that, after the 12-month measurement period, is it correct to understand that there is no need to adjust the ‘cost of investment’ and ‘goodwill’, and all changes of contingent consideration will be recognised either within equity (if the consideration is in the form of shares), or income statement & liability (if the consideration is in the form of financial instruments/loan payment).
Following are some information I copied from the rulebook:
According to the standard – IFRS 3 Business Combinations (revised):
”Changes due to events which took place after the acquisition date, for example, meeting earnings target, or reaching a specified share price, and they are not measurement period adjustments (within 12 months after acquisition date), Such changes are accounted for separately from the business combination.”
” … the contingent consideration classified as equity shall not be re-measured, and its subsequent settlement shall be accounted for within equity (eg Cr share capital/share premium Dr retained earnings).
… The contingent consideration classified as an asset or a liability that:
– is a financial instrument and is within the scope of IAS 39 shall be measured at fair value, with any resulting gain or loss recognised either in profit or loss, or in other comprehensive income in accordance with that IFRS
– is not within the scope of IAS 39 shall be accounted for in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, or other IFRSs as appropriate.”Thank you very much in advance.
Best regards,
JuliaI think the Viesturs example fits into your very last sentence and should be treated according to IAS 37. However, this doesn’t help with the debit entry. In the example I have taken the debit to Cost of Investment with the credit going to Liabilities. If you can persuade me I’m wrong, then I’ll accept your correction. But I think I’m right
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