BRIEF EXERCISE 2-1 - Solutions Manual Copyright © 2013 John Wiley ...

Solutions Manual to accompany Fayerman: Advanced Accounting−Updated Canadian Edition Chapter 2 Solutions Manual Copyright © 2013 John Wiley & Sons Canada, Ltd. 1

CHAPTER 2

Business Combinations

BRIEF EXERCISES

BRIEF EXERCISE 2-1

According to IFRS 3 Business Combinations, a business combination is a transaction or other event in which an acquirer obtains control of one or more businesses.

For a business combination to occur, there has to be an economic transaction between two entities.

Control exists when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.

BRIEF EXERCISE 2-2

The acquisition date is the date on which the acquirer obtains control of the acquiree.

It is important because on this date:

 The fair values of the identifiable assets acquired and liabilities assumed are measured. The fair value of the consideration transferred is measured. The goodwill or gain on bargain purchase is calculated.

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Solutions Manual to accompany Fayerman: Advanced Accounting−Updated Canadian Edition Chapter 2 Solutions Manual Copyright © 2013 John Wiley & Sons Canada, Ltd. 2

BRIEF EXERCISE 2-3

Contingent consideration is:

Usually, an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions are met. However, contingent consideration also may give the acquirer the right to the return of previously transferred consideration if specified conditions are met.

The consideration transferred includes any asset or liability resulting from a contingent consideration arrangement. This is measured at fair value at acquisition date.

The acquirer shall classify the obligation to pay contingent consideration as a liability or equity.

Changes in the measurement of the obligation subsequent to the acquisition date resulting from events after the acquisition date are accounted for differently depending on whether the obligation was classified as equity or debt.If it is classified as equity, the equity shall not be remeasured and the subsequent settlement is accounted for within equity.If it classified as a financial liability, it is accounted for under IAS 39 and is subsequently measured at fair value with movements being accounted for in accordance with that standard.Any adjustments are recognized in profit or loss.

The subsequent accounting for contingent consideration is to treat it as a post-acquisition event and it does not affect the measurements made at the acquisition date.

BRIEF EXERCISE 2-4

In a business combination, the identifiable assets acquired and liabilities assumed shall be recognized separately from goodwill.

Because the assets and liabilities are measured at fair value, the assets and liabilities are recognized regardless of the degree of probability of inflow/outflow of economic benefits. The fair value reflects expectations in its measurement.

The assets and liabilities recognised must meet the definitions of assets and liabilities in the Framework.

The assets and liabilities recognised must also be part of the exchange transaction rather than resulting from separate transactions.

In recognizing the assets and liabilities, it is necessary to classify or designate them. The acquirer does this based on the contractual terms, economic conditions, its operating or accounting policies, and other pertinent conditions that exist at the acquisition.

Solutions Manual to accompany Fayerman: Advanced Accounting−Updated Canadian Edition Chapter 2 Solutions Manual Copyright © 2013 John Wiley & Sons Canada, Ltd. 3

BRIEF EXERCISE 2-5

According to IFRS 3 Business Combinations, for each business combination, one of the combining entities shall be identified as the acquirer.

The acquirer is the entity that obtains control of the acquiree.

Control is the power to govern the financial and operating policies of the acquiree so as to obtain benefits from its activities.

Determination of the acquirer sometimes requires judgement. IFRS 3 provides some indicators

to assist in assessing which entity is the acquirer:

 Is there a large minority voting interest in the combined entity? The acquirer is usually the entity that has the largest minority voting interest in an entity that has a widely dispersed ownership. What is the composition of the governing body of the combined entity? The acquirer is usually the combining entity whose owners have the ability to elect, appoint or remove a majority of the members of the combined entity’s governing body. What is the composition of the senior management that governs the combined entity subsequent to the combination? This is an important indicator given that the criterion for identifying an acquirer is that of control. What are the terms of the exchange of equity interests? Has one of the combining entities paid a premium over the pre-combination fair value of one of the combining entities, an amount paid in order to gain control? Which entity is the larger? This could be measured by the fair value of each of the combining entities, or relative revenues or profits. In a takeover, it is normally the larger company that takes over the smaller company (that is, the larger company is the acquirer). Which entity initiated the exchange? Normally the entity that is the acquirer is the one undertakes action to take over the acquiree. What are the relative voting rights in the combined entity after the business combination? The acquirer is usually the entity whose owners have the largest portion of the voting rights in the combined entity

BRIEF EXERCISE 2-6

The key steps in applying the acquisition method are:

• Identify the acquirer.
• Determine the acquisition date.
• Recognize and measure the identifiable assets acquired, the liabilities assumed and any

non-controlling interest in the acquiree.

• Recognize and measure goodwill or a gain from a bargain purchase.

Solutions Manual to accompany Fayerman: Advanced Accounting−Updated Canadian Edition Chapter 2 Solutions Manual Copyright © 2013 John Wiley & Sons Canada, Ltd. 4

BRIEF EXERCISE 2-7

IFRS 3 Business Combinations states that the consideration transferred shall be:  measured at fair value, determined at acquisition date, and  calculated as the sum of the fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree, and the equity interests issued by the acquirer.

BRIEF EXERCISE 2-8

Fair value is defined according to IFRS 13 Fair Value Measurement as:

“the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

Fair value is a market-based measurement, not an entity-specific measurement. For some assets and liabilities, observable market transactions or market information might be available.For other assets and liabilities, observable market transactions and market information might not be available. However, the objective of a fair value measurement in both cases is the same — to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).

When a price for an identical asset or liability is not observable, an entity measures fair value using another valuation technique that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. Because fair value is a market -based measurement, it is measured using the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. As a result, an entity's intention to hold an asset or to settle or otherwise fulfill a liability is not relevant when measuring fair value.

A fair value measurement is for a particular asset or liability. Therefore, when measuring fair value an entity shall take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.