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The measurement period ends as soon as the acquirer obtains enough information to finalise the provisional amounts, but in any event does not exceed one year from the date of
acquisition. [IFRS 3.45]
Adjustments that arise after the end of the measurement period should be recognised as revisions of estimates in accordance with IAS 8 Accounting policies, changes in accounting
estimates and errors and therefore recognised in profit or loss in the current and future periods. Where an error is identified, retrospective treatment is required in accordance with
IAS 8.
The adjustment of provisional figures should reflect new information about facts and circumstances that existed at the acquisition date. This also extends to the recognition of
new assets or liabilities if this new information would have led to their recognition, had it been known at the acquisition date. [IFRS 3.45]
Illustration 7
XYZ acquired ABC on 30 June 2007. By 31 December 2007, the end of its 2007 reporting period, XYZ had provisional fair values for the following:
1 trademarks effective in certain foreign territories of CU400,000. These had an
average remaining useful life of 10 years at the acquisition date. The acquisition date fair value was finalised at CU500,000 on 31 March 2008.
2 trading rights in other foreign territories of CU600,000. These had an average
remaining useful life of 5 years at the acquisition date. The acquisition date fair value was finalised at CU300,000 on 30 September 2008.
XYZ’s 2007 financial statements: Recognised in profit or loss in 2007:
Amortisation of trademarks and trading rights for 6 months based on their provisional values
Intangible assets: Trademarks and trading rights at provisional values less 2007 amortisation
XYZ’s 2008 financial statements: The finalisation of the fair value of the trademarks is made within the measurement period 12
months from the acquisition date, so it is related back to that date. The finalisation in respect of the trading rights is made after the end of that period, so it is recognised in profit or loss
prospectively from 30 September 2008.
For the trademarks, the 2007 comparative figures will be restated for the revised amortisation and carrying amount.
7.4 Subsequent measurement
The assets and liabilities identified and recognised, along with any equity instrument issued as a result of a business combination, should be measured in accordance with the relevant
standard following the recognition of the business combination. However, IFRS 3 provides specific guidance in the area of: [IFRS 3.54]
reacquired rights – where a reacquired right is recognised as an intangible asset, it
should be amortised over its remaining contractual period;
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contingent liabilities recognised at the acquisition date – until the liability is
settled or cancelled it should be measured at the higher of the amount that would be recognised in accordance with IAS 37 and the amount initially recognised at the
acquisition date less any amortisation, if this is appropriate, in accordance with IAS 18 Revenue;
indemnification assets – at the end of each reporting period an indemnification
asset recognised as part of a business combination should be measured on the same basis as that applied on the acquisition date. This measurement is subject to any
contractual limitations on the amount; and
contingent consideration – as set out above.
8 Goodwill and Gains on Bargain Purchases
Goodwill is the amount paid to gain access to the future economic benefits anticipated to be generated from the assets not specifically identified and separately recognised.
8.1 Recognition and measurement of goodwill
IFRS 3 requires goodwill resulting from a business combination to be recognised as an asset of the acquiring entity. Goodwill is measured as the excess of the consideration transferred
plus the amount of any non-controlling interest in the acquiree over the identifiable assets and liabilities recognised. If the business combination has been achieved in stages, as discussed
above, then the consideration will also include the fair value of the acquirer’s previously held equity interests in the acquiree at the acquisition date. [IFRS 3.32]
After initial recognition, goodwill should not be systematically amortised by charges to profit or loss on a straight-line or other basis. It should be carried in the statement of financial position
at cost less accumulated impairment losses where the recoverable amount of the goodwill falls below its current carrying amount. Goodwill should be tested for impairment at least on
an annual basis in accordance with the requirements of IAS 36 Impairment of assets.
Although recognised as an asset, goodwill should not be revalued, and therefore it will either be carried in the statement of financial position at the amount recognised on initial recognition
or it will be reduced as impairment losses are recognised.
Illustration 8
ABC acquired an 80 interest in DEF for CU900,000. The carrying amounts and fair values of DEF’s identifiable assets and liabilities at the acquisition date were as follows:
Carrying Fair
amounts value
CU000 CU000
Tangible non-current assets 375
350 Intangible non-current assets
200 Current assets
400 350
Liabilities 300
300 Contingent liabilities
30 475
570 ABC has decided to measure the non-controlling interest at its share of DEF’s identifiable
net assets. The goodwill calculation is as follows.
CU000
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Consideration transferred 900
Non-controlling interest 20 of CU570 fair value 114
1,014 Fair value of net assets acquired
570 Goodwill
444
8.2 Gain on bargain purchase
The term bargain purchase, or negative goodwill, is used to describe the excess of the identifiable net assets recognised in a business combination over the consideration
transferred and the non-controlling interest in the acquiree. It is generally unusual for a discount to arise, since it means that the acquirer paid less than net asset value for the
business. Such a situation may however arise where the seller has to raise funds urgently a “forced sale”.
IFRS 3 assumes that such an amount will not normally arise and therefore may have arisen as a result of an error in the measurement of the acquiree’s net assets, the non-controlling
interest or the consideration transferred. It requires the acquirer to reassess the recognition of the identifiable net assets acquired. The acquirer is then required to review the procedures
that it used to measure:
the identifiable net assets acquired; any non-controlling interest in the acquiree;
the acquirer’s previously held equity interest in the acquiree where a business combination has been achieved in stages; and
the consideration transferred. If a discount still remains after the reassessment has been completed, then it should be
recognised in profit or loss in the period in which the business combination took place. This treatment is required since any discount reflects the reality that a bargain purchase was
made.
Illustration 9
Assuming the same facts as in Illustration 8 above except that the consideration transferred was CU400,000 rather than CU900,000.
The gain arising on this business combination is: CU000
Consideration transferred 400
Non-controlling interest 20 of CU570 fair value 114
514 Net assets acquired
570 Gain on bargain purchase negative goodwill
56 The gain of CU56,000 should be recognised in profit or loss in the year of acquisition.
8.3 Adjustments to provisional values
