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Practical caseIFRS 3L3 · Advanced

Contingent consideration and measurement period: classification, initial fair value, remeasurement, contingent liability, indemnification asset and retrospective adjustments

6 documents21 tasks≈ 120 min
0 / 24 items completed
Standards
IFRS 3 — Business Combinations
Assistance levelNo help · reduced assistance
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: shown

Case brief

Situation

Brevalis Group SA (fictitious entity) acquired Soren Analytics SAS on 1 October 20X6 for cash and three contingent consideration elements. You follow the accounting for the combination after the acquisition date: contingent consideration elements, information received during and after the measurement period, litigation assumed and sellers' indemnity.

Your assignment

Classify the elements, compute the initial fair value of element A, the total consideration and the changes in fair value; deal with the settlement of element B; date the measurement period, deal with the three pieces of information and compute the goodwill adjustment; analyse the litigation assumed, its subsequent measurement and the indemnification asset; record the nine entries requested, present their effect and conclude. One document is not useful.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Advanced level: no help, the work is grouped by kind.

Documents

File documents

6 documents: open each one to read it.

Document 1Memo

Group profile and case conventions

Brevalis Group SA (fictitious entity) closes its consolidated accounts on 31 December. It acquired all of Soren Analytics SAS on 1 October 20X6. Case conventions: amounts in EUR, rounded to the cent; scenarios, probabilities, discount rates and fair values are case data; case convention (pedagogical assumption, not attributed to IFRS 3): the initial fair value of a cash-settled contingent consideration element is estimated by the weighted average of the possible payments, discounted at the rate given, a method that is not the only one possible; the collection of the indemnity is not in doubt (the contractual limit applies under IFRS 3); the tax rate of the adjustment is 25 %; the entries are illustrative, the adjustments being recorded against goodwill.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Cash paid at closing€2,000,000.00
Element A: payment of scenario 1 (none)€0.00
Element A: probability of scenario 130%
Element A: payment of scenario 2€400,000.00
Element A: probability of scenario 250%
Element A: payment of scenario 3€800,000.00
Element A: probability of scenario 320%
Discount rate of element A8%
Number of periods until payment of element A2 units
Element C: initial fair value€120,000.00
Element B: initial fair value (equity)€150,000.00
Element A: fair value at 31 December 20X6€340,000.00
Element C: fair value at 31 December 20X6€90,000.00
Shares of element B: fair value at settlement€190,000.00
Provisional goodwill at 31 December 20X6€1,350,000.00
Decrease in the acquisition-date fair value of the customer relationships€60,000.00
Decrease in the deferred tax liability€15,000.00
Liability of the supplier dispute existing at the acquisition date€80,000.00
Amount of the tax inspection observation received after the period€25,000.00
Initial fair value of the contingent liability assumed€90,000.00
Cap of the sellers' indemnity€60,000.00
Liability amount under IAS 37 at 31 December 20X6€70,000.00
Expected annual market growth12%

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort6

  • Group profile and case conventions

  • Acquisition agreement of Soren Analytics SAS: price and contingent consideration elements

  • Valuations at 31 December 20X6 and at settlement

  • Measurement period monitoring

  • Litigation assumed and indemnification clause of the sellers

  • Market growth forecasts

Relevant to the treatment0

    No effect0

      Questions

      Work programme

      21 tasks in the order of the file. Calculations, entries and effects on the financial statements are marked; written answers are self-assessed against the solution.

      1. Task 1Analysis

        How should elements A, B and C be classified, and at what value do they enter the consideration?

      2. Task 2Calculation

        Compute the probability-weighted estimate of the possible payments of element A.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the probability-weighted estimate of the possible payments of element A.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      3. Task 3Calculation

        Compute the initial fair value of element A (present value).

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the initial fair value of element A (present value).

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      4. Task 4Calculation

        Compute the total consideration transferred.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the total consideration transferred.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      5. Task 5Calculation

        Compute the change in fair value of elements A and C at 31 December 20X6.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the change in fair value of elements A and C at 31 December 20X6.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Decrease in fair value of element C (gain)

      6. Task 6Analysis

        Where should the changes in elements A and C be recognised, and what about element B on its settlement?

      7. Task 7Analysis

        Date the measurement period and deal with each of the three pieces of information received.

      8. Task 8Calculation

        Compute the measurement period goodwill adjustment (liability identified, decrease in the asset, decrease in deferred tax) and the adjusted goodwill.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the measurement period goodwill adjustment (liability identified, decrease in the asset, decrease in deferred tax) and the adjusted goodwill.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Adjusted goodwill

      9. Task 9Analysis

        Must the litigation assumed be recognised at the acquisition date although the outflow of resources is not probable?

      10. Task 10Calculation

        Measure the contingent liability at 31 December 20X6 after its initial recognition.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Measure the contingent liability at 31 December 20X6 after its initial recognition.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      11. Task 11Calculation

        Compute the indemnification asset to recognise.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the indemnification asset to recognise.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      12. Task 12Journal entries

        Record element A as a liability at the acquisition date.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      13. Task 13Journal entries

        Record element C as a liability and element B in equity at the acquisition date.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Journal entry · Journal entries

        Entry 2 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      14. Task 14Journal entries

        Record the increase in fair value of element A.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      15. Task 15Journal entries

        Record the decrease in fair value of element C.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      16. Task 16Journal entries

        Record the settlement in shares of element B.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      17. Task 17Journal entries

        Record the contingent liability assumed at the acquisition date.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      18. Task 18Journal entries

        Record the indemnification asset.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      19. Task 19Journal entries

        Record the measurement period adjustment.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        3. Line 3

        4. Line 4

        TotalsDebit0Credit0

      20. Task 20Effects on the financial statements

        What is the cumulative effect of the nine entries on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      21. Task 21Conclusion

        Write the conclusion.

      Workspace

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 24).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IFRS 3 §40
      • IFRS 3 §58
      • IFRS 3 §50
      • IFRS 3 §23
      • IFRS 3 §27
      • IFRS 3 §28
      • IFRS 3 §57
      • IFRS 3 §39
      • IFRS 3 §45
      • IFRS 3 §24
      • IFRS 3 §54
      • IFRS 3 §56