Contingent Liability upon Business Combination ?

On 1 December 2011, Joey acquired 30% of the ordinary shares of Margy for a cash consideration of $600 million when the fair value of Margy’s identifiable net assets was $1,840 million. Joey treated Margy as an associate and has equity accounted for Margy up to 1 December 2013. Joey’s share of Margy’s undistributed profit amounted to $90 million and its share of a revaluation gain amounted to $10 million. On 1 December 2013, Joey acquired a further 40% of the ordinary shares of Margy for a cash consideration
of $975 million and gained control of the company. The cash consideration has been added to the equity accounted balance for Margy at 1 December 2013 to give the carrying amount at 30 November 2014.

At 1 December 2013, the fair value of Margy’s identifiable net assets was $2,250 million. At 1 December 2013, the fair value of the equity interest in Margy held by Joey before the business combination was $705 million and the fair value of the non-controlling interest of 30% was assessed as $620 million. The retained earnings and other components of equity of Margy at 1 December 2013 were $900 million and $70 million respectively. It is group policy to measure the non-controlling interest at fair value.

2. At the time of the business combination with Margy, Joey has included in the fair value of Margy’s identifiable net assets, an unrecognised contingent liability of $6 million in respect of a warranty claim in progress against Margy. In March 2014, there was a revision of the estimate of the liability to $5 million. The amount has met the criteria to be recognised as a provision in current liabilities in the financial statements of Margy and the revision of the estimate is deemed to be a measurement period adjustment.

How this second adjustment of contingent liability will be treated upon consolidation
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