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Company A acquires 5 other companies (N1,N2 N3 N4 and N5) 100% shares on same date. The total assets of N5 appear to be less that total liabilities resulting in net liability in amount of -366K USD for which company agrees to pay 584K USD in form of deferred consideration.
Company A treated this transaction as a business combination and recognized goodwill in amount 950 KUSD.
If I apply the IFRS 3 point 34 :
Occasionally, an acquirer will make a bargain purchase, which is a business combination in which the amount in paragraph 32(b) exceeds the aggregate of the amounts specified in paragraph 32(a). If that excess remains after applying the requirements in paragraph 36, the acquirer shall recognize the resulting gain in profit or loss on the acquisition date.
The gain shall be attributed to the acquirer.Can you advise me on accounting treatment of above mentioned transaction Do I have goodwill as a result of this transaction? How else should I account for it?
Thanks in advance .
Hi,
Yes, just because the company is in a net liabilities position does not mean that there will be zero goodwill. You calculate the goodwill in the usual fashion and if it is negative then it is treated as a bargain purchase.
Thanks
Hi,
Thanks for your prompt reply.
From the context of your answer it is apparent to me that for case mentioned earlier company A should treat this transaction as a business combination, but calculation of goodwill is possible in two ways :
1. In amount of 950 KUSD (950K =584K – (366K)) or
2. In amount of 218K USD (218 K= 584K-366K).
Which calculation comply with IFRS 3 Business combination requirements?
Could you please clarify?
Thanks in advance.
Dear Tutor,
Let me explain two approaches for my earlier example :
1 calculation is:
The deferred consideration that must be transferred plus liabilities that obtained during acquisition i.e :
KUSD 584,000 -(-KUSD 366,000) =KUSD 950,000 Goodwill or2 calculation is
The deferred consideration that must be transferred plus liabilities that obtained during acquisition i.e :
KUSD 584,000 -(KUSD 366,000) =KUSD 288,000 GoodwillIn my opinion there may be 3-rd treatment as such:
3 .Deferred consideration + new (obtained as result of acquisition) liabilities = Loss recognised in parent’s PL&OCI .
KUSD 584,000 -(-KUSD 366,000) =KUSD 950,000 LossIn case if other treatment according to IFRS 3: Business acquisition is applicable please provide.
Thanks for your time and effort.
Armen
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