IFRS 3

BUSINESS COMBINATIONS
LECTURE NOTES &
EXAMPLES
Prepared by BIANCA NEL CA (SA)
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RECOGNITION PRINCIPLE =
Must meet the DEFINITIONS OF
ASSET/LIABILITIES but NOT the CF MEASUREMENT PRINCIPLE =

IFRS 3 (Probable & Reliable measured)

[IFRS 3.10]
Acquirer shall measure the identifiable assets acquired and
the liabilities assumed @ acquisition-date FV

ACQUISITION METHOD [IFRS 3.4-5]

Acquisition
of a INITIAL

Acquisition

[IFRS 3.59-63]
RECOGNITION

Disclosure
business?
Identify Consideration measurement Goodwill/gain on Measurement

DATE
acquirer of IDENTIFIABLE NCI
[IFRS 3.3] transferred of FV of bargain purchase period
[IFRS 3.7] assets & [IFRS 3.19]
[IFRS 3.37-38] IDENTIFIABLE [IFRS 3.32] [IFRS 3.45-46]
liabilities
- App A = Def A/L
- App B = App
- Guidance IFRS 10 DATE RULE: • A/L recognised RULE: (1) Consideration • Limited to 1 year
Flowchart CONTROL CONTROL FV @ acquisition SEPARATELY FV @ @ Prop transferred from acquisition
- Illustrative
date acquisition share of net + NCI date
Examples
• Basic date assets • Provision FV
EXAMPLE 1 recognitions:
+ FV of previously recognised if
• Market OR held interest as at
meet definitions accounting
INTANGIBLE ASSETS: 1. Costs directly values/valuati acquisition date
incomplete
1. Identifiable Exceptions [IFRS 3.42]
attributable NOT on techniques (2) • Provisional FV
- Separability Criterion part of BC (contingent FV (only acquisition
adjusted
[IFRS 3.B31-B33] (expense) liabilities, Exceptions [SHARE IN achieved in stages)
retrospectively
- Contractual-legal Criterion [1 exception] income taxes, (income taxes, GW] - net assets • Correction of
= separate from GW [IFRS 3.53] employee employee acquired and error if it
EXAMPLE 2 EXAMPLE 4 benefits, benefits, measured in terms becomes know
2. Non-identifiable 2. Contingent indemnification indemnification of IFRS 3 = after
considerations assets, assets, goodwill/gain on measurement
= included in GW
[IFRS 3.;37-39- leases when re-acquired bargain purchase period (IAS 8)
40;58] acquiree is lessee) rights, share-
EXAMPLE 3 based payment Goodwill =
awards, assets recognise as asset,
Contingent Liability [IFRS 3.23]
Subsequent Measurement [IFRS 3.56] held for sale) subsequent
Recognise at the HIGHER: impairment test
1. amount that would be recognised ito IAS 37 Gain of bargain
2. the initial amount recognised purchase = reassess
Indemnification asset? [IFRS 3.57]
all items;
*Disclosure ito IAS 37 Seller contractually indemnify acquirer for the
outcome of if still a gain,
related to all or part of a specific asset or liability recognise at
EXAMPLE 5 acquisition date in
P/L

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APPLICATION GUIDANCE TO DETERINE ACQUISITION OF A BUSINESS

Do the acquired assets and liabilities meet the definition of a business?

1. Single identifiable asset/group

2. Fair value:
Do you want to apply the concentration test?  FV of net id assets
 FV of gross assets [B7B(b)]
Have you met the YES  Assets acq excl. B7B(a) assets
criteria for the
concentration NO
test? B7B Business = inputs + a substantive
process + the ability to
contribute to the ability to create outputs.
NO
YES
Do the activities and assets have outputs at acquisition date?

B12B B12C
NO YES

Is the process critical to? Is the process critical when applied to the?
the ability to develop inputs to continue producing outputs,
NO YES
or AND
convert the inputs into there is a skilled, knowledgeable or
outputs? experienced organised workforce to
perform the process?
YES
NO

Do the inputs include? Does the process significantly

NO
a skilled, knowledgeable or Contribute?
YES
experienced organized to the ability to
workforce to perform the continue producing output
process AND
AND is considered unique/scarce;
other inputs the workforce or cannot be replaced without
could develop or convert into significant impact on the ability
outputs? to continue producing outputs?

NO
YES

Acquisition is Acquisition is a
NOT a business business

Purchased assets: Purchased assets:

Apply asset standards Apply IFRS 3 Business
(i.e IAS 16,38,40; etc.) combinations

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It indicates the LINK between the IFRS 3 principles and using the AOE. FOR USE BY CA CAMPUS STUDENTS ONLY
IFRS 3 Principles in the AOE (9 Min)

Analysis of owners' equity:

Parent Ltd NCI
?% ?%
Analysis of owners' equity: EXAMPLE
Total At Since
R R R R
AT ACQUISITION:
Share Capital XXX
Share Premium XXX
Mark-to-market reserve XXX
Retained earnings Exception to recognition
XXX principle of
WHY SEPARATE RECOGNITION? CF. Follow IFRS recognition principle
Separate recognition
- Customer contracts Liabilities not recognised as part of the fair value exercise if
- Client lists (if separable) they result from the acquirer's intention or future actions,
- Internally generate trademarks because they did not exist AT acquisition date.
- Contingent Liability (initial recogn)
If not at FV: [FV adjustment]
- Land (def tax)

Reacquired rights 1. Intangible asset in at fair value in consolidated financial statements

2. Settlement gain/loss in acquirer’s separate financial statements
NB! Excluded by Unisa TL 3. Amortisation of the intangible asset
Included for completeness purpose.
Indemnification asset

XXX XXX XXX

Goodwill/Gain on bargain purchase XXX
Consideration paid
- Contingent Consideration [IFRS3.39] XXX

SINCE:
Retained earnings XXX XXX XXX
Different rules for IFRS 3 purposes: Subseq Measurement (IFRS 3.56)
Subsequent measurement: Recognise at HIGHER: amount that would be recognised (IAS 37) or initial
amount recognised less cumulative amortisation in terms of IFRS 15 Revenue
- Contingent Liability (initial recogn) from Contracts with Customers
Reacquired rights [amortise]
Indemnification asset Measure on same basis as indemnified asset/liability

CURRENT YEAR:
Profit for the year XXX XXX XXX

Dividends paid (XXX) (XXX) (XXX)

XXX XXX XXX

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IFRS 3:

Application of the acquisition method illustrated in calculation:

Consideration transferred XXX

PLUS: Non-Controlling interest XXX

PLUS: Fair Value of previously held interest XXX

XXX
LESS: Fair Value of identifiable assets acquired and (XXX)
liabilities assumed

Goodwill/(Gain on bargain purchase) XXX/(XXX)

Net asset value

- Share capital
- Retained earnings
- Customer contracts
- Client lists (if separable)
- Internally generated trademarks
- Land
- Provision for packages
- XXXX
- XXXX
= TOTAL NET ASSETS OF COMPANY XXXX

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Example 1 Consideration for business combination (Group Statements)

On 1 January 20.19, P Ltd acquired a 90% interest in S Ltd. P Ltd acquired the shares from Mr
Controlall, the former owner. From that date P Ltd had control over S Ltd as per the definition of
control in terms in terms of IFRS 10. The consideration is to be settled as follows:
 A cash payment of R800 000.
 Transfer of a vehicle to Mr. Controlall. The fair value of the vehicle is R75 000 and the carrying
amount in the records of P Ltd was R65 000.
 P Ltd will settle an outstanding liability of R40 000 on behalf of MR Controlall.
 P Ltd will issue 3 000 shares to Mr. Controlall. P Ltd.’s shares had a market price of R10 per
share on 1 January 20.19 and R11 per share at the end of the financial period.

The total consideration is therefore R945 000 (R800 000 + R75 000 + R40 000 + R30 000
(3 000 x R10)). P Ltd shall account for the transaction in its own records as follows:
Dr Cr
R R
1 January 20.19
Investment in S Ltd (SFP) 945 000
Bank (SFP) 800 000
Property, plant and equipment (SFP) (carrying amount) 65 000
Gain on transfer of vehicle (P/L) 10 000
Sundry liabilities (SFP) 40 000
Share capital (SCE) 30 000
Recognition of the consideration for the business combination
of S Ltd

Comment
The consideration transferred should be measured at the acquisition-date fair values.

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Example 2 Identifiable assets & liabilities (Source: Descriptive Accounting)

Intangible asset (Contractual/Legal criterion)

X Ltd acquired 75% interest in Y Ltd on 1 July 20.17. Business combination. Y Ltd has a 3-year
agreement to supply goods to Z Ltd. Both X & Y believe that Z will renew the supply
agreement at the end of the term of the current contract.
The supply agreement meets the contractual/legal criterion for identification as an
intangible asset and Fair Value is deemed to be measured reliably. It should be recognised
separately from goodwill.
In addition, the customer relationship between Y & Z is also established through a contract
and therefore meets the contractual/legal criterion for recognition as an intangible asset.
Therefore, should be recognised as an intangible asset distinct from goodwill.

Intangible asset (not identifiable)

X Ltd acquired 75% interest in Y Ltd on 1 July 20.17. Business combination. Y Ltd has an
assembled workforce, which is an existing collection of employees that permits X Ltd to
continue to operate all operations of Y Ltd from 1 July 20.17.

The assembled workforce does not represent the intellectual capital of the skilled workforce
and is not an identifiable asset to be recognised separately from goodwill. Furthermore, it
does not meet the 'control' criterion of the definition of an asset. Any value placed on the
assembled workforce shall thus be subsumed into goodwill (IFRS 3. B37).

Contingent liabilities – initial and subsequent measurement

Conti Ltd is acquiring all the shares in Liabi Ltd on 1 July 20.17 for R1 000 000. Business
Combination. Conti Ltd is aware that Liabi has disclosed a continent Liability with a fair value
of R100 000 for a claim against the company and has consequently factored this matter into
its purchase price of R1 000 000

The contingent liability of R100 000 (fair value) identified at the date of the business combination of
Conti Ltd and Liabi Ltd would result in the following consolidation journal entry:
Dr Cr
1 July 20.17 R R
Retained earnings (equity at acquisition) 100 000
Contingent liability (recognised) (SFP) 100 000
Accounting for the contingent liability at acquisition
Equity at acquisition (900 000 – 100 000) 800 000
Goodwill (SFP) 200 000
Investment in Liabi Ltd (SFP) 1 000 000
Elimination of equity at acquisition date against investment in Liabi Ltd

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Comment
➢ The equity at acquisition of R800 000 (900 000 – 100 000 (contingent liability)) will be eliminated
against the investment in the subsidiary of R1 000 000, and will result in goodwill of R200 000
being recognised in the consolidated financial statements.

If it is assumed that the year ends of Conti Ltd and Liabi Ltd fall on 30 September, the following cases
are possible at 30 September 20.17:

Case 1
At 30 September 20.17, the court case in respect of the claim (contingent liability) has progressed to
such an extent that it is virtually certain that Liabi Ltd will have to pay
R150 000. Applying the principles of IAS 37 in its own financial statements, Liabi Ltd will have to raise
a provision of R150 000 since the outflow has become probable and a reliable estimate is possible.
The journal in the records of Liabi Ltd will be as follows:
Dr Cr
30 September 20.17 R R
Claim expense – legal (P/L) 150 000
Provision in respect of claim (SFP) 150 000
Accounting for provision in respect of previous contingent liability

In the case of the business combination effected on 1 July 20.17, the liability raised in respect of the
contingent liability should be assessed in terms of IFRS 3.56 and measured at the higher of:
• The amount recognised in terms of IAS 37, namely R150 000.
• The amount actually recognised in terms of IFRS 3, namely R100 000.
Since the R150 000 recognised in terms of IAS 37 is higher, the liability in the consolidated financial
statements should be reflected at R150 000. This will result in the following consolidation journal
entry:
Dr Cr
30 September 20.17 R R
Contingent liability (recognised) (SFP) 100 000
Claim expense – legal (P/L) 100 000
Reversal of contingent liability raised initially at acquisition

Comment
➢ Although it would appear that the liability in respect of the claim is being removed from the
consolidated financial statement in its entirety, this is not the case, as the liability of R150 000 in
the individual financial statements of Liabi Ltd will replace it. If this is not reversed the contingent
liability would have been accounted for twice in the consolidated financial statements.
➢ The net effect of the above two transactions (individual financial statements of Liabi Ltd and
consolidated financials would be that a claim expense of R50 000 (150 000 – 100 000) would
appear in the consolidated profit or loss.

Case 2
Although there were no further developments in respect of the claim (the court case was postponed
till January 20.18), there is still a good chance that the claim will succeed. Consequently, the
measurement rules of IFRS 3.56 should still be applied. The contingent liability in the consolidated
financial statements should be measured at the higher of:
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• The amount recognised in terms of IAS 37: Rnil (this is still a contingent liability); and
• The amount recognised in terms of IFRS 3: R100 000

Since the R100 000 is higher, the contingent liability remains at R100 000 in the consolidated
financials and no further journals (consolidation or other) would be required.

Example3: Contingent consideration (Source: Descriptive Accounting)

Bambi Ltd acquired a 75% interest in the shares of Boo Ltd on 1 July 20.16 (this qualifies as a
business combination) at cash amount of R10 000 000. The fair value of the net assets of Bambi Ltd
amounted to R12 000 000. In terms of the purchase agreement, Bambi Ltd is required to make an
additional cash payment of R1 000 000 if the sales figure of Boo Ltd increases by more than 12%
during the 18 months after the acquisition date. On 1 July 20.16, the fair value of Bambi Ltd’s shares
was R10 per share, and in 31 December 20.17, it was R12,50.

At the acquisition date, the fair value of this contingent payment was eliminated (based on past
sales figures, estimates of future expected sales and other related factors) to be
R780 000. The liability was classified at fair value through profit or loss. Assume that Bambi Ltd
elected to measure non-controlling interests at their proportionate share of net identifiable assets at
acquisition date.

The end of the reporting period of the group is 31 December 20.16. The fair value of this contingent
payment was remeasured to R850 000 at that date.

Dr Cr
1 July 20.16 R R
Investment in Boo Ltd (SFP) 10 780 000
Cash/bank (SFP) 10 000 000
Liability for contingent consideration (SFP) 780 000
Contingent consideration (derivative) recognised as part of
consideration for business combination
31 December 20.16
Fair value adjustment (P/L) (850 000 – 780 000) 70 000
Liability for contingent consideration (SFP) 70 000
Fair value adjustment on contingent consideration (derivative)

Assume that sales increased by more than 12% over the 18 months ended 31 December 20.17 as
stipulated in the contingent consideration clause of the purchase agreement. Bambi Ltd will
therefore be obliged to pay the R1 000 000 agreed upon. The relevant journal entries would be:
Dr Cr
31 December 20.17 R R
Fair value adjustment (P/L) 150 000
Liability for contingent consideration (SFP)
(1 000 000 – 850 000) 150 000
Fair value adjustment on date of settlement of obligation
Liability for contingent consideration (SFP) 1 000 000
Bank (SFP) 1 000 000
Settlement of liability for contingent consideration
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The consolidation journal in respect of the initial acquisition is as follows:

Dr Cr
31 December 20.16 and 20.17 R R
Equity at acquisition (SFP) (given) 12 000 000
Goodwill (SFP) 1 780 000
Investment in Boo Ltd (SFP) 10 780 000
Non-controlling interests (SFP) (12 000 000 x 25%) 3 000 000
Elimination of investment against equity at acquisition

Comment
➢ The subsequent change in the fair value of the liability (derivative) for contingent consideration
does not affect the acquisition date fair value of the consideration transferred. Thus, subsequent
changes in value for post combination events and circumstances should not affect the
measurement of the consideration transferred or goodwill on the acquisition date.
➢ As indicated earlier, contingent considerations classified as equity would probably arise from
issuing a fixed number of ordinary shares (Bambi Ltd's shares) and in terms of IAS 32 Financial
Instruments: Presentation and such items are not remeasured subsequently. If the original
agreement therefore stipulated that 78 000 (R780 000/R10) of Bambi Ltd's shares should be
issued in settlement, R780 000 will be recognised as equity at initial recognition of the contingent
consideration and purchase. The amount will not be remeasured subsequently (differs from
liabilities) and will be settled on 31 December 20.17 by issuing 78 000 shares and accounting for
R780 000.
➢ As also indicated earlier, the issuance of a variable number of Bambi Ltd's shares in settlement of
a contingent consideration would be a liability (refer to the definition of a financial liability in IAS
32). This would be treated exactly like a normal financial liability at fair value through profit or
loss and the liability would be remeasured to fair value intermittently (refer to the journals in the
first section of the question). On settlement at 31 December 20.17 the share issue will take place
at the ruling fair value (share price) of Bambi Ltd's shares, namely R12,50. Sufficient shares at a
fair value of R12,50 would therefore be issued to cover the contingent consideration of
R1 000 000 – thus 80 000 shares (1 000 000/R12,50) accounted for at R1 000 000.

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ADDITIONAL EXPLANATION IN TERMS OF THE COMMENT ABOVE:

For Test 1 purposes you do not need to know financial instruments in this much dept.
However always good to understand when you do these questions and the reason why I
include additional comments as well.

Let's first look at the definitions as per IAS 32:

FINANCIAL INSTRUMENTS = Contract gives rise to a financial asset of one entity and a
financial liability/equity of another entity. (IAS 32.15)

Below is a diagram that we will discuss during our Financial Instruments Lecture:
[This is based on IAS 32.15-16]
How do I determine if the instrument issued is a financial liability or and
This is called the
equity instrument? critical feature

Is there a contractual obligation to deliver cash/financial assets? (IAS 32.15-16)

YES NO

The contract is a Financial

Liability

Will the contract be settled in

entity's own equity
instruments? Substance rather
than legal form =
YES NO governs
classification
(IAS 32.18)
The number of The number of The contract
shares to be shares to be cannot be
issued is fixed issued is variable classified as equity
or a liability

Equity Financial Liability

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Example 4 Acquisition-related costs (Group Statements)

P Ltd acquired a 90% interest in S Ltd on 1 October 20.18 for R1 million. From that date P Ltd had
control over S Ltd as per the definition of control in terms of IFRS 10. The consideration was settled
as follows:
 Cash of R500 000; Acquisition related costs:
 Issuing 50 000 shares to the seller to the value of R300 000; Refer to IFRS 3.53
 Issuing debentures to the seller to the value of R200 000.

Legal and other costs incurred in relation to the acquisition of the shares in S Ltd amounted to
R63 000. Costs to issue the shares and the debentures amounted to R45 000 and R32 000
respectively.

P Ltd shall account for the transaction in its own records as follows:
Dr Cr
R R
1 October 20.18
J1 Investment in S Ltd (SFP) 1 000 000
Bank (SFP) 500 000
Share capital (SCE) 200 000
Debentures (financial liability) (SFP) 300 000
Recognition of the consideration for the business
combination of S Ltd
J2 Other expense (P/L) 63 000
Retained earnings (SCE) 45 000
Debentures (financial liability) (SFP) 32 000
Bank (SFP) 140 000
Recognition of the acquisition-related costs for the business
combination of S Ltd

GOOD QUESTION:
Discuss, with reasons, the following matter in consolidated financial statements:
Explain the difference in the accounting treatment of acquisition-related costs between
investments in associates and investments in subsidiaries.
Subsidiaries: The acquirer shall account for acquisition-related costs as expenses in the periods in
which the costs are incurred and the services are received [IFRS 3.53]. The acquisition-related costs
will thus not form part of the cost of the investment.
Associates: The cost for associates include the purchase price and other costs directly attributable
to the acquisition or issue of the asset such as professional fees for legal services, transfer taxes
and other transaction costs [IAS 28.10 (E1 footnote)]. The acquisition-related costs will thus form
part of the cost of the investment.

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Example 5 Indemnification Assets (Extract of question) (Source: FAC 4863/102 2017)

Acquisition date: 1 January 20.11

Colour Ltd disclosed a contingent liability of R450 000 in their financial statements on
1 January 20.11 relating to a court case involving a patent right not meeting industry
standards. The claim represents a present obligation but at this point in time the attorneys
of Colour Ltd are of the opinion that it is unlikely to lead to an outflow of economic benefits
due to a lack of evidence to support the claim. The R450 000 is the fair value of the claim
taking into account all possible outcomes on 1 January 20.11.
As part of the purchase agreement by Italia Ltd, the shareholders have guaranteed to
reimburse Colour Ltd 40% of the claim, should it be successful.
On 31 December 20.11 the court case has progressed to such an extent that it is virtually
certain that Colour Ltd will have to pay R550 000. Colour Ltd recognised a provision of R550
000 in its financial statements on 31 December 20.11. The related transaction have been
recorded correctly in Colour Ltd’s financial statements.
The claim will not be deductible for taxation purposes should it succeed.

Prepare the journal entry at date of elimination of the investment and the reversal of the
contingent liability raised.

Recognition of the indemnification asset

1 January 20.11
Share capital (SCE)
Retained earnings (SCE)
Machinery (SFP)
Land (SFP)
Intangible asset – reacquired rights (SFP)
Goodwill (SFP) [
Indemnification asset (SFP) (450 000 x 40%) 180 000
Non-controlling interests (SFP/SCE)
Recognised contingent liability (SFP)
Deferred tax (SFP)
Investment in Colour Ltd (SFP)
Elimination of investment – at acquisition journal
Contingent liability (SFP) (given) 450 000
Indemnification asset (SFP) 180 000
Legal expense (P/L) 270 000
Reversal of contingent liability raised at acquisition

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Colour Ltd raised a provision in its own accounting records of R550 000 at 31 December
20.11 relating to the legal claim. A contingent liability was also recognised as a liability (in
respect of the legal claim) in the consolidated financial statements at acquisition date
(R450 000). This contingent liability and indemnification asset previously recognised in the
group’s financial statements on acquisition date must now be reversed in order to avoid
“double accounting” for this liability.

FAQ:

QUESTION 1:
Contingent Consideration is included our consideration. This payment is conditional to a
future occurrence, what will happen if the condition for this consideration is not met and
the parent doesn't pay the amount? How will this be accounted for?

Remember in who's records the contingent consideration is recognised.

This is in the PARENTS. When we refer to Lecture Example 3.

The journal is as follow:

[Copy below from our Lecture Examples]
Look at the liability in terms of the contingent consideration journals.

The end of the reporting period of the group is 31 December 20.16. The fair value of this
contingent payment was remeasured to R850 000 at that date.
Dr Cr
1 July 20.16 R R
Investment in Boo Ltd (SFP) 10 780 000
Cash/bank (SFP) 10 000 000
Liability for contingent consideration (SFP) 780 000
Contingent consideration (derivative) recognised as part of consideration for business combination
31 December 20.16
Fair value adjustment (P/L) (850 000 – 780 000) 70 000
Liability for contingent consideration (SFP) 70 000
Fair value adjustment on contingent consideration (derivative)

Assume that sales increased by more than 12% over the 18 months ended 31 December
20.17 as stipulated in the contingent consideration clause of the purchase agreement.
Bambi Ltd will therefore be obliged to pay the R1 000 000 agreed upon. The relevant journal
entries would be:
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Dr Cr
31 December 20.17 R R
Fair value adjustment (P/L) 150 000
Liability for contingent consideration (SFP)
(1 000 000 – 850 000) 150 000
Fair value adjustment on date of settlement of obligation
Liability for contingent consideration (SFP) 1 000 000
Bank (SFP) 1 000 000
Settlement of liability for contingent consideration

If the consideration is NOT met: The liability in the records of the PARENT will be transferred
to P/L.
Dr. Liability for contingent consideration = take this out
Cr. Liability for contingent consideration P/L = there is NO such an account, however in
terms of our disclosure purposes we need to indicate this amount separately on the P/L to
be able to take this OUT when we calculate our income tax payable.

The following paragraph is NOT relevant to your questions, however I wanted to

communicate this to you. Please make a note: I think it is important to identify how all the
different standards link to each other.
IFRS 3.40 The acquirer shall classify an obligation to pay contingent consideration that
meets the definition of a financial instrument as a financial liability or as equity on the basis
of the definitions of an equity instrument and a financial liability in paragraph 11 of IAS 32
Financial Instruments: Presentation. The acquirer shall classify as an asset a right to the
return of previously transferred consideration if specified conditions are met. Paragraph 58
provides guidance on the subsequent accounting for contingent consideration. => This will
make sense after we have covered WEEK 9 - Financial Instruments.

QUESTION 2:
Additional information was received after the acquisition date in terms of the contingent
consideration, how will this be treated?

SUBSEQUENT MEASUREMENT: IFRS 3.58

Some changes in the fair value of contingent consideration that the acquirer recognises
after the acquisition date may be the result of additional information that the acquirer
obtained after that date about facts and circumstances that existed at the acquisition date.
Such changes are measurement period adjustments in accordance with paragraphs 45–49.

However, changes resulting from events after the acquisition date, such as meeting an
earnings target, reaching a specified share price or reaching a milestone on a research and
development project, are not measurement period adjustments.

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The acquirer shall account for changes in the fair value of contingent consideration that are
not measurement period adjustments as follows:
(a) Contingent consideration classified as equity shall not be remeasured and its subsequent
settlement shall be accounted for within equity.
(b) Other contingent consideration that:
(i) is within the scope of IFRS 9 shall be measured at fair value at each reporting date and
changes in fair value shall be recognised in profit or loss in accordance with IFRS 9.
(ii) is not within the scope of IFRS 9 shall be measured at fair value at each reporting date
and changes in fair value shall be recognised in profit or loss.

Based on this. In a question they need to specify to the details in terms of the agreement.

At acquisition date: RECOGNISE THE FAIR VALUE OF THE CONTINGENT CONSIDERATION =

this amount shall be recognised to the INVESTMENT in the Separate records of the PARENT.
Should the Contingent consideration INCREASE due to additional targets met: This will NOT
be measurement period adjustments as per paragraph 58 above. Then the additional
consideration will be recognised in P/L as per Paragraph 58 above.

QUESTION 3:
I am struggling to understand the treatment of a fair value adjustment on a contingent
consideration at group level in terms of recognizing the fair value adjustment in the
consolidated profit or loss and the contingent consideration in the consolidated statement
of financial position.

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This extract below if from the IFRS 3 - Lecture Examples

-> Example 3.
I will make use of the basics in this example to explain the
contingent consideration first in the Parents records and then in the GROUP records.
At acquisition date: the contingent consideration had a FAIR VALUE of R780 000.

Below is the journal that will be recognised in the

In the AOE ito the
SEPARATE RECORDS OF THE PARENT:
consideration calc. This
amount will be included
in this TOTAL + R780 000

The end of the reporting period of the group is 31 December 20.16.

The fair value of this contingent payment was remeasured to R850 000 at that date.

Below is the journal that will be recognised ito the FV adjustment This is
SEPARATE RECORDS OF THE PARENT: NOT in
the AOE =
this is in
terms of
the
PARENT.

The FV adjustment amount of R70 000 will be INCLUDED IN THE P/L of the PARENT and due to consolidation (parent + sub) = this amount will be included in
the GROUP P/L. Same principle in terms of the CONTINGENT LIABILITY: The initial journal to credit the contingent consideration with 780 000 plus the
second journal credit contingent consideration with 70 000 = The R850 000 will be presented on the FACE of the SFP of the PARENT and GROUP as a
contingent consideration of R850 000.
Acquisition related costs: The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred
and the services are received [IFRS 3.53]. The acquisition-related costs will thus not form part of the cost of the investment.

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 FOR USE BY CA CAMPUS STUDENTS ONLY

ADDITIONAL EXPLANATION OF EXAMPLE I ITO IFRS 3.B7B

(a) gross assets acquired shall exclude cash and cash equivalents, deferred tax assets, and
goodwill resulting from the effects of deferred tax liabilities.

At fair
Concentration calc value
R
Building 500
Intangible asset 400
Gross assets [B7B(a)] 900

(b) the fair value of the gross assets acquired shall include any consideration transferred (plus
the fair value of any non‑controlling interest and the fair value of any previously held interest)
in excess of the fair value of net identifiable assets acquired.
=> explanation of how to calculate the fair value of the gross assets:

FV of
>
Consideration FV of NET
GROSS + EXCESS + FV of NCI
+ FV of previously held shares
identifiable
assets
[NR 1 below]
ASSETS [NR 2 below]

Acquired

At fair
Concentration calc value
R
Building 500
Gross assets
Intangible asset 400
Gross assets [B7B(a)] 900
Plus: Excess 100
B7B(b) 1 400
Consideration paid 200
NCI at FV 120
Previously held interest 80

Net asset value acquired 2 (300)

Buildings 500
Intangible asset 400
Cash 100
Financial liabilities (700)
Deferred tax liability X
fair value of the
gross assets
Fair value of gross assets acquired 1 000
acquired
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 FOR USE BY CA CAMPUS STUDENTS ONLY

The fair value of the gross assets acquired may normally be determined as the total obtained
by adding
• the fair value of the consideration transferred (plus the fair value of any non-
controlling interest and the fair value of any previously held interest)
• to the fair value of the liabilities assumed (other than deferred tax liabilities), and then
• excluding the items identified in subparagraph (a).
However, if the fair value of the gross assets acquired is more than that total, a more precise
calculation may sometimes be needed.

controlling interest and the fair value of

any previously held interest) 400
fair value of the liabilities assumed (other
than deferred tax liabilities) 700 fair value of the
excluding the items identified in
gross assets
subparagraph (a). (100)
acquired
1 000

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