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On 31 July 2008, Grange acquired a 100% of the equity interests of Fence for a cash consideration of $214 million. The identifiable net assets of Fence had a provisional fair value of $202 million, including any contingent liabilities. At the time of the business combination, Fence had a contingent liability with a fair value
of $30 million. At 30 November 2009, the contingent liability met the recognition criteria of IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ and the revised estimate of this liability was $25 million. The accountant of Fence is yet to account for this revised liability.I am confused regarding the above note, is it that we recognize contingent liability in the consolidated statement of financial position at 30.Nov.2009 because at this date it stopped being a contingent liability and moved into being a provision (because IAS 37 criteria are met now at this date) or is it that we recognize the contingent liability of $25 million because IFRS 3 allows the “exception rule” (against IAS 37) that we can recognize contingent liabilities in the consolidated statement of financial position. Can you clarify for me please, and also give me more details on this “exception rule” on contingent liabilities and their relation with consolidated statement of financial position, and when they are accounted for in the consolidated balance sheet?
Yes, because it is now a provision, it should be recognized at fair value as at consolidation date.
The exception rule relates to the fact that under IAS 37 we do not account for contingent liabilities – they are merely shown as a note in the financial statements. But under IFRS 3 we take account of contingent liabilities when determining the fair value of the assets acquired on acquisition date.
The post-acquisition movement of a decrease of 5 in the value of the contingent liability (now classified as a provision) is taken into account when calculating post-acquisition movement in the subsidiary’s net assets
I think that answers your question but, if not, please post again
Hello Dear Mike
Hope you are fine 😉 .I have a question about the above part of question. When we want to calculate goodwill, we have included a contingent liabilty = $30M in the net asset of Fence ( the subsidiary).
Now the question is why we should include CONTINGENT liabilty ? It is contingent, so the subsidiary company can not recognise it as a provision and only an appropriate disclosure should be done.
Is it a rule that we should include contingent liabilty in the fair value of the subsidiary? What about contingent assets?Thank you in advance
Kind RegardsYes, it IS a rule that contingencies be taken into account upon the acquisition of a subsidiary
Ok?
Thank you with your reply.
by contingencies you mean both contingent assets and contingent liabilties? Yeah ?Dear Mike, i have recently gone through a business combination exercise. It was for the ACCA Diploma IFRS in June 2014.
In note 2 of the paper, there was one subsidiary in which we had to account for two fair value adjustments (PPE and an intangible asset) and also we had to consider a contingent liability. Also, In this note it was mentioned that FV adjustments were subject to deferred tax.
The paragraph for the contingent liability is following:
“On 1 July 2013, Gamma had a contingent liability which it did not recognise in its own financial statements. This contingent liability still existed, and was still unrecognised by Gamma, at 31 March 2014. As at 1 July 2013, the directors of Alpha believed that the contingent liability had a fair value of $16 million. On 31 March 2014, they reassessed its fair value at $12 million. The reassessment was due to a change in circumstances after 1 July 2013.”
Going through the answer i noticed that:
– deferred tax movement was recognized for PPE and the intangible asset (due to depreciation of course, as depreciation decreased the carrying amount of these two assets – i agree with this treatment)
– no deferred tax movement was recognized for the contingent liability although the fair value changed from 16 to 12 million. only this difference of 4 million was recognized in consolidated Statement of Profit & Loss. not any deferred tax.
Why is that ? why deferred tax is recognized in PPE and the intangible asset and not recognized in this contingent liability ?
I would appreciate very much your opinion.
Kind Regards
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