Contingent liabilities assumed

Learning objectives

• Determine whether a contingent liability assumed is recognised at the acquisition date (present obligation and fair value that can be measured reliably), with no probable outflow criterion.L2, L3
• Calculate the subsequent measurement of a recognised contingent liability at the higher of the amount under IAS 37 and the amount initially recognised less the cumulative income recognised under IFRS 15.L2, L3

Normative references

• IFRS 3 §23A contingent liability assumed is recognised at the acquisition date if it is a present obligation that arises from past events and its fair value can be measured reliably, even if an outflow of resources is not probable, contrary to IAS 37; its subsequent accounting is governed by para. 56. A contingent asset is not recognised (para. 23A).
• IFRS 3 §56After initial recognition and until it is settled, cancelled or expires, a contingent liability recognised in a business combination is measured at the higher of two amounts: the amount under IAS 37 and the amount initially recognised less the cumulative income recognised in accordance with IFRS 15; the requirement does not apply to contracts within the scope of IFRS 9.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• In a business combination, the acquiree is the defendant in a lawsuit. At the acquisition date, it is a present obligation arising from past events whose fair value can be measured reliably; an outflow of resources is, however, not probable. What treatment does the acquirer apply?L2
• In a business combination, Orme SA assumed a contingent liability (a guarantee given to customers) recognised at {initial_amount} at the acquisition date. At the reporting date, the amount determined under IAS 37 is {ias37_amount} and the cumulative income recognised since the acquisition under IFRS 15 in respect of this guarantee is {cumulative_income}. Case convention: the guarantee is not within IFRS 9. Calculate the subsequent measurement of the contingent liability.L3
• At the acquisition date, Rhône SA assumes a contingent liability (a dispute with a customer): it is a present obligation arising from past events, whose fair value, reliably measured, is {cl_fair_value}. Case convention: the entry is made at business combination level, against goodwill. Record the entry recognising the contingent liability assumed.L3