entity a s first ifrs financial statements are for a reporting period that ends on 3 611087

Business combination example

Background

Entity A”s first IFRS financial statements are for a reporting period that ends on 31 December 2013 and include comparative information for 2012 only. On 1 July 2009, Entity A acquired 100 per cent of Entity B. Under its previous GAAP, Entity A:

(a) classified the business combination as an acquisition by Entity A;

(b) measured the assets acquired and liabilities assumed at the following amounts under previous GAAP at 31 December 2011 (date of transition to IFRSs):

(i) identifiable assets less liabilities for which IFRSs require cost-based measurement at a date after the business combination: €200 (with a tax base of €150 and an applicable tax rate of 30 per cent);

(ii) pension liability (for which the present value of the defined benefit obligation measured under IAS 19 is €130 and the fair value of plan assets is €100): €nil (because Entity A used a pay-as-you-go cash method of accounting for pensions under its previous GAAP). The tax base of the pension liability is also €nil;

(iii) goodwill: €180;

(c) did not, at the date of acquisition, recognise deferred tax arising from temporary differences associated with the identifiable assets acquired and liabilities assumed.

In its opening (consolidated) IFRS statement of financial position, Entity A:

(a) classifies the business combination as an acquisition by Entity A even if the business combination would have qualified under IFRS 3 as a reverse acquisition by Entity B; [IFRS 1.C4(a)];

(b) does not adjust the accumulated amortisation of goodwill. Entity A tests the goodwill for impairment under IAS 36 and recognises any resulting impairment loss, based on conditions that existed at the date of transition to IFRSs. If no impairment exists, the carrying amount of the goodwill remains at €180; [IFRS 1.C4(g)];

(c) for those net identifiable assets acquired for which IFRSs require cost-based measurement at a date after the business combination, treats their carrying amount under previous GAAP immediately after the business combination as their deemed cost at that date; [IFRS 1 C4(e)];

(d) does not restate the accumulated depreciation and amortisation of the net identifiable assets in (c) above, unless the depreciation methods and rates under previous GAAP result in amounts that differ materially from those required under IFRSs (for example, if they were adopted solely for tax purposes and do not reflect a reasonable estimate of the asset”s useful life under IFRSs). If no such restatement is made, the carrying amount of those assets in the opening IFRS statement of financial position equals their carrying amount under previous GAAP at the date of transition to IFRSs (€200); [IFRS 1 IG7];

(e) if there is any indication that identifiable assets are impaired, tests those assets for impairment, under IAS 36,based on conditions that existed at the date of transition to IFRSs (see 7.14);

(f) recognises the pension liability, and measures it, at the present value of the defined benefit obligation (€130) less the fair value of the plan assets (€100), giving a carrying amount of €30, with a corresponding debit of €30 to retained earnings. [IFRS 1.C4(d)]. However, if Entity B had already adopted IFRSs in an earlier period, Entity A would measure the pension liability at the same amount as in Entity B”s individual financial statements; [IFRS 1.D17, IG Example 9];

(g) recognises a net deferred tax liability of €6 (€20 at 30 per cent) arising from:

(i) the taxable temporary difference of €50 (€200 less €150) associated with the identifiable assets acquired and non-pension liabilities assumed; less

(ii) the deductible temporary difference of €30 (€30 less €nil) associated with the pension liability.

Entity A recognises the resulting increase in the deferred tax liability as a deduction from retained earnings. [IFRS 1 Appendix C4(k)]. If a taxable temporary difference arises from the initial recognition of the goodwill, Entity A does not recognise the resulting deferred tax liability. [IAS 12.15(a)].