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IFRS 3Workpapers (Step 4 of 5)

Workpaper template

Step 4 of 5
WorkpaperIFRS 3 — Business CombinationsL2 · L3 · L4

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

12 missions10 sections to document90 min
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Status
Published

Objective of the workpaper

Classify the contingent consideration (liability or equity), estimate its initial fair value from the scenarios and the rate of the case, track its changes after the acquisition date, distinguish measurement period adjustments (against goodwill) from later changes (in profit or loss), and deal with the contingent liability, the indemnification asset, the reacquired right and the replacement award. Scenarios, probabilities, rates and caps are case data; the probability-weighted estimate is not the only fair value method.

10 sections · 51 blocks · 10 calculations · 9 entries

  • IFRS 3 §40
  • IFRS 3 §58
  • IFRS 3 §23
  • IFRS 3 §27
  • IFRS 3 §28
  • IFRS 3 §57
  • IFRS 3 §50
  • IFRS 3 §29
  • IFRS 3 §30
  • IFRS 3 §B56
  • IFRS 3 §61

Work this workpaper as a mission

Each case that uses this template opens in the mission workspace: data, analysis, calculation, entries, conclusion and review, with your progress saved.

12 instances from the cases: the calculations and entries below are run by the calculation engine.

File and entity
Contingent consideration and measurement period: classification, initial fair value, remeasurement, contingent liability, indemnification asset and retrospective adjustments
Case tasks documented here
  • How should elements A, B and C be classified, and at what value do they enter the consideration?
  • Compute the probability-weighted estimate of the possible payments of element A.
  • Compute the initial fair value of element A (present value).
  • Compute the change in fair value of elements A and C at 31 December 20X6.
  • Where should the changes in elements A and C be recognised, and what about element B on its settlement?
  • Date the measurement period and deal with each of the three pieces of information received.
  • Compute the measurement period goodwill adjustment (liability identified, decrease in the asset, decrease in deferred tax) and the adjusted goodwill.
  • Measure the contingent liability at 31 December 20X6 after its initial recognition.
  • Compute the indemnification asset to recognise.
  • Record element A as a liability at the acquisition date.
  • Record element C as a liability and element B in equity at the acquisition date.
  • Record the increase in fair value of element A.
  • Record the decrease in fair value of element C.
  • Record the settlement in shares of element B.
  • Record the contingent liability assumed at the acquisition date.
  • Record the indemnification asset.
  • Record the measurement period adjustment.
1

Facts and data

Inputs

  • Terms of the contingent consideration: triggering event, due date, settlement method, classification analysis

    Text

    CASH_EARN_OUT_PAYABLE_IN_TWO_YEARS

  • Contingent payment scenarios: amount and probability (%)

    Table

    SCENARIO_NONE · 0 · 30 | SCENARIO_MEDIUM · 400,000 · 50 | SCENARIO_HIGH · 800,000 · 20

  • Discount rate (case datum, %)

    Number

    8 %

  • Number of periods until payment

    Number

    2 units

  • Initial fair value of the contingent consideration classified as a liability (to record)

    Number

    308,641.98

  • Opening fair value of the contingent consideration

    Number

  • Closing fair value of the contingent consideration

    Number

  • Amount of the contingent consideration classified in equity settled in shares

    Number

  • Information obtained after the reporting date: date received, facts existing at the acquisition date, provisional amounts concerned

    TextRequired

  • Liability existing at the acquisition date identified during the measurement period

    Number

  • Decrease in the fair value of an asset acquired, at the acquisition date

    Number

  • Decrease in the deferred tax liability related to this adjustment (case datum)

    Number

  • Initial fair value of the contingent liability assumed

    Number

  • Amount of the contingent liability under IAS 37 at the reporting date

    Number

  • Initial amount less the cumulative income recognised under IFRS 15

    Number

  • Amount of the indemnified item measured on the same basis

    Number

  • Contractual cap of the indemnity (case datum)

    Number

  • Annual charge of the reacquired right (value ÷ remaining contractual term, case datum)

    Number

  • Number of months in the period since the acquisition date

    Number

  • Market-based measure of the replacement award

    Number

  • Share of the service rendered before the combination (case datum, %)

    Number

  • Post-combination remuneration expense of the period

    Number

2

Supporting documents

Evidence

  • Documents obtained and referenced (contract clauses, valuations, letters received after the reporting date)

    EvidenceRequired

3

Analysis of the contingent consideration and the measurement period

Analysis

IFRS 3 §40IFRS 3 §58IFRS 3 §23IFRS 3 §27IFRS 3 §50IFRS 3 §29IFRS 3 §30IFRS 3 §B56IFRS 3 §61

  • Points reviewed: contingent consideration and measurement period

    ChecklistRequired

    • Contingent consideration included in the consideration transferred at its fair value at the acquisition date
    • Obligation classified as a liability or equity on the basis of the definitions in para. 11 of IAS 32 (IFRS 3, para. 40)
    • After the acquisition date: liability or asset at fair value with changes in profit or loss; equity not remeasured
    • Provisional amounts identified at the reporting date and end of the measurement period (at most one year) dated
    • New information on facts existing at the acquisition date: retrospective adjustment against goodwill
    • After the period: change only to correct an error under IAS 8; later changes under the applicable rules
    • Contingent liability assumed recognised if a present obligation from past events and its fair value is reliably measurable; probability of outflow not required
    • Indemnification asset measured on the same basis as the indemnified item, within the contractual limit on the indemnified amount (IFRS 3; at the reporting date, para. 57)
    • Reacquired right measured and amortised over the remaining contractual term, possible renewals excluded
    • Replacement award split: earlier service in the consideration, remainder as post-combination expense
4

Calculations

Calculations

IFRS 3 §40IFRS 3 §58IFRS 3 §23IFRS 3 §27IFRS 3 §29IFRS 3 §B56

  • Probability-weighted estimate of the contingent payments (before discounting)

    Calculation

    360,000

    Contingent payment scenarios: amount and probability (%)

  • Initial fair value: weighted estimate discounted at the rate of the case

    Calculation

    308,641.98

    Probability-weighted estimate of the contingent payments (before discounting) ; Discount rate (case datum, %) ; Number of periods until payment

  • Increase in the fair value of the liability (loss in profit or loss)

    Calculation

    0

    Closing fair value of the contingent consideration ; − Opening fair value of the contingent consideration

  • Decrease in the fair value of the liability (gain in profit or loss)

    Calculation

    0

    Closing fair value of the contingent consideration ; − Opening fair value of the contingent consideration

  • Measurement period goodwill adjustment (liability identified + decrease in asset − decrease in deferred tax)

    CalculationRequired

    0

    Liability existing at the acquisition date identified during the measurement period ; Decrease in the fair value of an asset acquired, at the acquisition date ; − Decrease in the deferred tax liability related to this adjustment (case datum)

  • Contingent liability after initial recognition: higher of the IAS 37 amount and the initial amount less cumulative income

    Calculation

    Amount of the contingent liability under IAS 37 at the reporting date ; Initial amount less the cumulative income recognised under IFRS 15

  • Indemnification asset: lower of the indemnified item and the cap

    Calculation

    Amount of the indemnified item measured on the same basis ; Contractual cap of the indemnity (case datum)

  • Amortisation of the period of the reacquired right (annual charge × months ÷ 12)

    Calculation

    Annual charge of the reacquired right (value ÷ remaining contractual term, case datum) ; Number of months in the period since the acquisition date

  • Portion of the replacement award included in the consideration (measure × share of earlier service)

    Calculation

    Market-based measure of the replacement award ; Share of the service rendered before the combination (case datum, %)

  • Remainder of the replacement award: post-combination expense to spread

    Calculation

    Market-based measure of the replacement award ; Share of the service rendered before the combination (case datum, %)

5

Illustrative entries

Entries

  • Entry: contingent consideration liability included in the consideration

    Entry

    AccountDebitCredit
    Goodwill (contingent consideration portion)308,641.98
    Contingent consideration liability308,641.98

  • Entry: increase in the fair value of the contingent consideration (loss)

    Entry

    Debit Loss on contingent consideration ← Increase in the fair value of the liability (loss in profit or loss) ; Credit Contingent consideration liability ← Increase in the fair value of the liability (loss in profit or loss)

  • Entry: decrease in the fair value of the contingent consideration (gain)

    Entry

    Debit Contingent consideration liability ← Decrease in the fair value of the liability (gain in profit or loss) ; Credit Gain on contingent consideration ← Decrease in the fair value of the liability (gain in profit or loss)

  • Entry: settlement in shares of a contingent consideration classified in equity

    Entry

    Debit Contingent consideration in equity ← Amount of the contingent consideration classified in equity settled in shares ; Credit Share capital and premium (shares issued) ← Amount of the contingent consideration classified in equity settled in shares

  • Entry: retrospective adjustment of a provisional amount charged to goodwill

    Entry

    Debit Goodwill (adjustment) ← Measurement period goodwill adjustment (liability identified + decrease in asset − decrease in deferred tax) ; Debit Deferred tax liability (decrease) ← Decrease in the deferred tax liability related to this adjustment (case datum) ; Credit Liability identified ← Liability existing at the acquisition date identified during the measurement period ; Credit Asset acquired (decrease in fair value) ← Decrease in the fair value of an asset acquired, at the acquisition date

  • Entry: indemnification asset recognised in reduction of goodwill

    Entry

    Debit Indemnification asset ← Indemnification asset: lower of the indemnified item and the cap ; Credit Goodwill (reduction) ← Indemnification asset: lower of the indemnified item and the cap

  • Entry: contingent liability assumed recognised at the acquisition date

    Entry

    Debit Goodwill (supplement) ← Initial fair value of the contingent liability assumed ; Credit Contingent liability assumed ← Initial fair value of the contingent liability assumed

  • Entry: amortisation of the reacquired right

    Entry

    Debit Amortisation expense ← Amortisation of the period of the reacquired right (annual charge × months ÷ 12) ; Credit Reacquired right ← Amortisation of the period of the reacquired right (annual charge × months ÷ 12)

  • Entry: remuneration expense of the replacement award

    Entry

    Debit Remuneration expense ← Post-combination remuneration expense of the period ; Credit Share-based payment reserve ← Post-combination remuneration expense of the period

6

Judgments: classification and measurement period

Judgment

IFRS 3 §40IFRS 3 §58IFRS 3 §50

  • Classification of the contingent consideration

    JudgmentRequired

    Liability (remeasured in profit or loss)

    Liability (remeasured in profit or loss) / Equity instrument (not remeasured) / Not applicable: no contingent consideration

    Professional judgment: classification follows the analysis of the terms; the case states the result of that analysis without making it a general rule.

  • Rationale: analysis of the obligation to pay

    Text

  • Measurement period: treatment of the information received

    JudgmentRequired

    Not applicable

    Within the period, facts existing at the acquisition date: adjustment of goodwill / After the period: no adjustment of the combination (error only) / Provisional amounts at the reporting date, period running / Not applicable

  • Rationale: date received, end date of the period, existing facts

    Text

7

Effect on the financial statements

FS impact

  • Effect derived from the entries

    Table

8

Items to document for the note on adjustments

Disclosure

IFRS 3 §61

  • Information to prepare for the note

    Checklist

    • Adjustments recognised during the year relating to combinations of the year or of earlier years
    • Items whose accounting is provisional, reasons and amounts of the measurement period adjustments
9

Conclusion

Conclusion

  • Classification, initial fair value, changes and measurement period adjustments submitted to the reviewer

    ConclusionRequired

10

Normative references

References

  • Normative references cited in this workpaper

    References

11

Checks and financial statement impact

  • Classification of the contingent consideration documentedPass
  • Treatment of the information received documentedPass
  • Recognition entry balancedPass
  • Loss entry balancedNot evaluated
  • Gain entry balancedNot evaluated
  • Share settlement entry balancedNot evaluated
  • Adjustment entry balancedNot evaluated
  • Indemnification entry balancedNot evaluated
  • Contingent liability entry balancedNot evaluated
  • Amortisation entry balancedNot evaluated
  • Remuneration entry balancedNot evaluated
Assets
308,641.98
Liabilities
308,641.98
Profit or loss
0
OCI
0
Equity
0