Pre-existing relationships

Learning objectives

• Calculate the gain or loss on settlement of a pre-existing relationship from the data in a case (off-market element and settlement amount).L3, L4
• Record the settlement of the pre-existing relationship separately from the consideration transferred.L3, L4

Normative references

• IFRS 3 §52Principle: a transaction entered into by or on behalf of the acquirer, or primarily for the benefit of the acquirer or the combined entity, rather than primarily for the benefit of the acquiree or its former owners, is likely to be a separate transaction; examples: settlement of a pre-existing relationship, remuneration for future services, reimbursement by the seller of the acquirer's acquisition-related costs.
• IFRS 3 §B52If the business combination in effect settles a pre-existing relationship, the acquirer recognises a gain or loss: for a non-contractual relationship (for example a lawsuit), at fair value; for a contractual relationship, at the lesser of the amount by which the contract is favourable or unfavourable from the perspective of the acquirer when compared with current market terms and the amount of any stated settlement provisions in the contract available to the counterparty to whom the contract is unfavourable; if the latter amount is the lesser, the difference is included as part of the business combination accounting. The amount recognised also depends on any related asset or liability previously recognised by the acquirer.

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

2 questions

• Before the combination, Hydre SA held a receivable of 400,000 from Algue SA, which it then acquires. Settlement of this pre-existing relationship in the transaction gives rise to a loss that the case measures at {settlement_loss}, reducing the receivable. Case convention: the loss is case data; it is recognised separately from the business combination. Record the entry for the settlement of the pre-existing relationship.L3
• Fabrique SA acquires Galet SA for 5,000,000. Before the transaction, Fabrique had granted a licence to Galet; the agreement states that 150,000 of the price relates to the settlement of that pre-existing licence. How does Fabrique treat this 150,000?L4