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WorkpaperIFRS 3 — Business CombinationsL1 · L2 · L3 · L4

Purchase price allocation: consideration transferred, fair values, deferred tax, non-controlling interest (two methods), goodwill or gain on a bargain purchase and allocation of goodwill

9 missions10 sections to document90 min
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Status
Published

Objective of the workpaper

List the consideration transferred, the fair values of the identifiable assets and liabilities assumed, the deferred tax on the fair value uplift, the non-controlling interest under both methods and the previously held interest; compute the goodwill or the excess to reassess, record the combination and allocate the goodwill to the cash-generating units. Fair values, rates, percentages and allocation keys are case data; the method chosen for the non-controlling interest is a choice of the acquirer, never imposed by the standard.

10 sections · 61 blocks · 18 calculations · 4 entries

  • IFRS 3 §10
  • IFRS 3 §11
  • IFRS 3 §15
  • IFRS 3 §19
  • IFRS 3 §21A
  • IFRS 3 §32
  • IFRS 3 §34
  • IFRS 3 §36
  • IFRS 3 §37
  • IFRS 3 §53
  • IFRS 3 §59
  • IFRS 3 §60
  • IFRS 3 §B64

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.

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

File and entity
Purchase price allocation: fair values, deferred tax, non-controlling interest (fair value or proportionate share), goodwill, gain on a bargain purchase and acquisition costs
Case tasks documented here
  • Among the items of Tessaly, which are recognised separately from goodwill? What should be done with the goodwill already carried by Tessaly?
  • Compute the deferred tax liability on the fair value difference of the building.
  • Compute the identifiable net assets of Tessaly (before and after deferred tax) and of Calnor.
  • Compute the consideration transferred for Tessaly and for Calnor.
  • Which method for measuring the non-controlling interest did Orvane choose for Tessaly, and is that choice imposed by the standard?
  • Compute the non-controlling interest of Tessaly at the proportionate share of the identifiable net assets.
  • Compute the goodwill of Tessaly before and after deferred tax, the goodwill with the interest at fair value, and the excess of Calnor before reassessment.
  • Compute the part of the goodwill attributable to the non-controlling interest under the fair value method.
  • Calnor: what must Orvane do before recognising a gain on a bargain purchase?
  • How should the fees of EUR 90,000 related to the acquisition of Tessaly be treated?
  • Record the combination with Tessaly (main entry, excluding deferred tax).
  • Record the deferred tax on the fair value difference against goodwill.
  • Record the fees related to the acquisition of Tessaly.
  • Record the combination with Calnor after reassessment.
1

Facts and data

Inputs

  • Description of the combination: acquiree, percentage acquired, agreements, particular items

    Text

    ACQUISITION_OF_A_MAJORITY_INTEREST_WITH_CONTROL

  • Fair value of the identifiable assets acquired (excluding right-of-use assets)

    Number

    3,200,000

  • Fair value of the liabilities assumed (excluding deferred tax and lease liability)

    Number

    900,000

  • Difference between fair value and tax base of the assets (taxable temporary difference)

    Number

    400,000

  • Tax rate (case datum, %)

    Number

    25 %

  • Fair value of a disposal group held for sale at the acquisition date

    Number

  • Costs to sell the disposal group held for sale

    Number

  • Cash transferred to the former owners

    Number

    1,700,000

  • Fair value of the equity instruments issued by the acquirer

    Number

    300,000

  • Liabilities incurred to the former owners

    Number

  • Fair value of contingent consideration classified as a liability

    Number

  • Portion of the replacement award included in the consideration (pre-combination service)

    Number

  • Fair value of the previously held interest at the acquisition date

    Number

  • Percentage held by the non-controlling shareholders (%)

    Number

    20 %

  • Fair value of the non-controlling interest (case datum)

    Number

    480,000

  • Non-controlling interest retained (method chosen)

    Number

    440,000

  • Acquisition-related costs (fees, legal costs)

    Number

    90,000

  • Remaining lease payment due in a single instalment (case datum)

    Number

  • Discount rate of the lease liability (case datum, %)

    Number

  • Number of periods until payment

    Number

  • Adjustment for favourable terms compared with the market

    Number

  • Adjustment for unfavourable terms compared with the market

    Number

  • Acquirer's ownership percentage (%)

    Number

  • Cash-generating units and expected synergies (allocation key)

    Table

  • Unit whose allocation is computed

    Choice

    First unit / Second unit

2

Supporting documents

Evidence

  • Documents obtained and referenced (acquisition agreement, valuation report, fee invoices)

    EvidenceRequired

3

Analysis of the allocation

Analysis

IFRS 3 §10IFRS 3 §11IFRS 3 §15IFRS 3 §19IFRS 3 §21AIFRS 3 §32IFRS 3 §34IFRS 3 §36IFRS 3 §37IFRS 3 §53IFRS 3IFRS 3IFRS 3 §59IFRS 3 §60IFRS 3 §B64

  • Points reviewed: purchase price allocation

    ChecklistRequired

    • Identifiable assets, liabilities assumed and non-controlling interest recognised separately from goodwill
    • Items classified or designated at the acquisition date on the basis of the conditions at that date
    • Exceptions applied: deferred tax, employee benefits, leases, held for sale, liabilities within IAS 37, insurance contracts
    • Fair values documented by the valuation retained (case data)
    • Method for the non-controlling interest chosen for this combination: fair value or proportionate share of the identifiable net assets
    • Consideration transferred = fair values of the assets transferred, liabilities incurred and equity instruments issued
    • Acquisition-related costs excluded from the consideration and expensed
    • Goodwill = consideration + non-controlling interest + previously held interest − identifiable net assets
    • Before any gain on a bargain purchase: identification and measurements reviewed; the remaining excess is recognised in profit or loss
    • Goodwill allocated to the cash-generating units expected to benefit from the synergies; gross-up if the non-controlling interest is at proportionate share
4

Allocation calculations

Calculations

IFRS 3 §32IFRS 3 §34IFRS 3 §36IFRS 3 §37IFRS 3 §19IFRS 3

  • Deferred tax liability on the fair value uplift (difference × rate)

    Calculation

    100,000

    Difference between fair value and tax base of the assets (taxable temporary difference) ; Tax rate (case datum, %)

  • Measurement of a disposal group held for sale (fair value − costs to sell)

    Calculation

    0

    Fair value of a disposal group held for sale at the acquisition date ; − Costs to sell the disposal group held for sale

  • Lease liability at the acquisition date (present value of the remaining payment)

    Calculation

    Remaining lease payment due in a single instalment (case datum) ; Discount rate of the lease liability (case datum, %) ; Number of periods until payment

  • Right-of-use asset (lease liability ± adjustment for market terms)

    Calculation

    0

    Lease liability at the acquisition date (present value of the remaining payment) ; Adjustment for favourable terms compared with the market ; − Adjustment for unfavourable terms compared with the market

  • Identifiable net assets of the main entry (assets − liabilities assumed, before deferred tax and leases)

    Calculation

    2,300,000

    Fair value of the identifiable assets acquired (excluding right-of-use assets) ; − Fair value of the liabilities assumed (excluding deferred tax and lease liability)

  • Identifiable net assets (assets, right-of-use asset, − liabilities assumed, − lease liability, − deferred tax)

    CalculationRequired

    2,200,000

    Fair value of the identifiable assets acquired (excluding right-of-use assets) ; Right-of-use asset (lease liability ± adjustment for market terms) ; − Fair value of the liabilities assumed (excluding deferred tax and lease liability) ; − Lease liability at the acquisition date (present value of the remaining payment) ; − Deferred tax liability on the fair value uplift (difference × rate)

  • Consideration transferred (cash + shares + liabilities incurred + contingent consideration + replacement award)

    Calculation

    2,000,000

    Cash transferred to the former owners ; Fair value of the equity instruments issued by the acquirer ; Liabilities incurred to the former owners ; Fair value of contingent consideration classified as a liability ; Portion of the replacement award included in the consideration (pre-combination service)

  • Non-controlling interest at proportionate share (identifiable net assets × percentage)

    Calculation

    440,000

    Identifiable net assets (assets, right-of-use asset, − liabilities assumed, − lease liability, − deferred tax) ; Percentage held by the non-controlling shareholders (%)

  • Goodwill recorded by the main entry (positive part)

    Calculation

    140,000

    Consideration transferred (cash + shares + liabilities incurred + contingent consideration + replacement award) ; Non-controlling interest retained (method chosen) ; Fair value of the previously held interest at the acquisition date ; − Identifiable net assets of the main entry (assets − liabilities assumed, before deferred tax and leases)

  • Excess of the net assets over the consideration, non-controlling interest and previous interest (to reassess before any gain)

    Calculation

    0

    Consideration transferred (cash + shares + liabilities incurred + contingent consideration + replacement award) ; Non-controlling interest retained (method chosen) ; Fair value of the previously held interest at the acquisition date ; − Identifiable net assets of the main entry (assets − liabilities assumed, before deferred tax and leases)

  • Final goodwill (method retained for the non-controlling interest)

    CalculationRequired

    240,000

    Consideration transferred (cash + shares + liabilities incurred + contingent consideration + replacement award) ; Non-controlling interest retained (method chosen) ; Fair value of the previously held interest at the acquisition date ; − Identifiable net assets (assets, right-of-use asset, − liabilities assumed, − lease liability, − deferred tax)

  • Goodwill if the non-controlling interest is at proportionate share

    Calculation

    240,000

    Consideration transferred (cash + shares + liabilities incurred + contingent consideration + replacement award) ; Non-controlling interest at proportionate share (identifiable net assets × percentage) ; Fair value of the previously held interest at the acquisition date ; − Identifiable net assets (assets, right-of-use asset, − liabilities assumed, − lease liability, − deferred tax)

  • Goodwill if the non-controlling interest is at fair value

    Calculation

    280,000

    Consideration transferred (cash + shares + liabilities incurred + contingent consideration + replacement award) ; Fair value of the non-controlling interest (case datum) ; Fair value of the previously held interest at the acquisition date ; − Identifiable net assets (assets, right-of-use asset, − liabilities assumed, − lease liability, − deferred tax)

  • Goodwill attributable to the non-controlling interest (full goodwill − partial goodwill)

    Calculation

    40,000

    Goodwill if the non-controlling interest is at fair value ; − Goodwill if the non-controlling interest is at proportionate share

  • Goodwill grossed up to 100 % for the impairment test (proportionate share)

    Calculation

    Final goodwill (method retained for the non-controlling interest) ; Acquirer's ownership percentage (%)

  • Share of the grossed-up goodwill belonging to the non-controlling interest

    Calculation

    Final goodwill (method retained for the non-controlling interest) ; Acquirer's ownership percentage (%)

  • Goodwill allocated to the unit selected (pro rata to the expected synergies)

    Calculation

    Final goodwill (method retained for the non-controlling interest) ; Cash-generating units and expected synergies (allocation key) ; Unit whose allocation is computed

  • Total allocated to the units (check: equal to the goodwill)

    Calculation

    Final goodwill (method retained for the non-controlling interest) ; Cash-generating units and expected synergies (allocation key)

5

Illustrative entries

Entries

  • Entry: business combination (goodwill or gain on a bargain purchase)

    Entry

    AccountDebitCredit
    Identifiable assets acquired3,200,000
    Goodwill140,000
    Liabilities assumed900,000
    Cash transferred1,700,000
    Shares issued (capital and premium)300,000
    Non-controlling interest440,000

  • Entry: deferred tax on the fair value uplift charged to goodwill

    Entry

    AccountDebitCredit
    Goodwill (supplement)100,000
    Deferred tax liability100,000

  • Entry: acquisition-related costs expensed

    Entry

    AccountDebitCredit
    Acquisition-related costs (expense)90,000
    Cash paid90,000

  • Entry: lease in which the acquiree is the lessee

    Entry

    Debit Right-of-use asset ← Right-of-use asset (lease liability ± adjustment for market terms) ; Debit Goodwill (unfavourable terms) ← Adjustment for unfavourable terms compared with the market ; Credit Lease liability ← Lease liability at the acquisition date (present value of the remaining payment) ; Credit Goodwill (favourable terms) ← Adjustment for favourable terms compared with the market

6

Judgments: fair values, non-controlling interest, reassessment, intangibles

Judgment

IFRS 3 §10IFRS 3 §11IFRS 3 §15IFRS 3 §19IFRS 3 §21AIFRS 3 §32IFRS 3 §34IFRS 3 §36IFRS 3 §37IFRS 3 §53IFRS 3IFRS 3IFRS 3 §59IFRS 3 §60IFRS 3 §B64

  • Source of the fair values retained

    JudgmentRequired

    Independent valuation provided by the case

    Independent valuation provided by the case / Management estimate provided by the case

    Professional judgment: the standard refers to a fair value determination without imposing a method; the amounts are case data.

  • Rationale: source, assumptions and limits of the fair values

    Text

    VALUATIONS_PROVIDED_BY_THE_CASE

  • Method for the non-controlling interest

    JudgmentRequired

    Proportionate share of the identifiable net assets

    Proportionate share of the identifiable net assets / Fair value / Not applicable: no non-controlling interest

    Professional judgment: the choice is made transaction by transaction; no method is imposed by the standard and the case states the one it retains.

  • Rationale for the choice (transaction by transaction)

    Text

    ELECTION_FOR_THIS_COMBINATION

  • Reassessment before a gain on a bargain purchase

    JudgmentRequired

    Not applicable: positive goodwill

    Excess confirmed after reassessment: gain in profit or loss / Excess eliminated by the reassessment: no gain / Not applicable: positive goodwill

  • Rationale: items reviewed (identification, measurements, consideration)

    Text

  • Identification of intangibles

    JudgmentRequired

    Identifiable intangibles recognised separately from goodwill

    Identifiable intangibles recognised separately from goodwill / No identifiable intangible other than goodwill

  • Rationale: contractual rights or separability

    Text

    CUSTOMER_CONTRACTS_FROM_CONTRACTUAL_RIGHTS

7

Effect on the financial statements

FS impact

  • Effect derived from the entries

    Table

8

Items to document for the business combination note

Disclosure

IFRS 3 §59IFRS 3 §60IFRS 3 §B64

  • Information to prepare for the note

    Checklist

    • Primary reasons for the combination and description of the acquiree
    • Consideration transferred by class and amounts recognised for each major class of assets and liabilities
    • Basis of measurement of the non-controlling interest
    • Nature of the goodwill recognised and any gain on a bargain purchase
    • Pro forma revenue and profit as if the combinations of the year had occurred at the beginning of the year
9

Conclusion

Conclusion

  • Consideration, identifiable net assets, non-controlling interest, goodwill or gain on a bargain purchase and entries submitted to the reviewer

    ConclusionRequired

10

Normative references

References

  • Normative references cited in this workpaper

    References

11

Checks and financial statement impact

  • Source of the fair values documentedPass
  • Method for the non-controlling interest documentedPass
  • Combination entry balancedPass
  • Deferred tax entry balancedPass
  • Acquisition costs entry balancedPass
  • Lease entry balancedNot evaluated
Assets
1,650,000
Liabilities
1,000,000
Profit or loss
-90,000
OCI
0
Equity
650,000