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Hello,
I am practising various exercises on Kaplan exam kit and I came across one exercise called Polestar (page 160) which gave me a bit of headache..hope you can shed some light.
In the question:
Polestar acquired 75% of Southstar with an immediate cash payment and in addition Polestar will pay a further amount of cash at the end of the following financial year if the subsidiary returns to profitability. The fair value of this contingent consideration at year end is 1.5 million.In the answer the Contingent consideration of 1.5 million is recognised in the CS of financial position within Current liabilities.
Now what I had understood was that Contingent assets/liabilities should never be recognised in the FS. They should be disclosed in the notes (IAS 37).
From this comes my doubt, why the contingent consideration is recognised in the FS in this case?I hope what I wrote is clear enough.
Thanks in advance for your clarification.
Regards.
AndreaThis is a bit of an anomaly, Andrea
IFRS 3 Business Combinations requires us to take account of contingencies – even though the chance of the event occurring is not even probable – it’s only possible
Otherwise you’re correct that matters that are contingent are not recognised until the probability of their crystallisation is >50% (liabilities) or >95% (assets)
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