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Example 1: Determining a Business
Company A is a building contractor. Company A purchased land and buildings from a third party. In this case this is not a business it is merely assets.
Example 2: Determining a Business
Company A acquired the stock, fixed assets, creditors, customers lists, (employees were also transferred) from a third party which produced customer products and which will continue to produce these products.
In this instance as they have acquired the fixed assets, stock (i.e. the inputs), and have the processes (i.e. the employees, customers) to produce the output (i.e. being the product), this would be classed as a business.
Example 3: Acquiring company
The shareholders of Company X and Y agree to join together under the same group. A new company, Company C is set up with Shareholder 1 and 2 as the owners. A transaction is entered into whereby Company A issues shares to each of its directors in proportion to the fair value of Company X & Y. Assume shares issued to Company X obtained 200 shares and Company Y was issued 100 shares. In this case Company C is not deemed to be the acquirer instead Company X is the acquirer as the fair value of Company X is well in excess of Company Y.
Company X would use the purchase accounting method to account for the acquisition. Company Y would use merger accounting.
However where an entity sets up a 100% subsidiary and provides funds to this new company to invest in another entity/business combination and the transaction is performed on an arm’s length basis, the acquirer would be the new company. Here there was no issue of shares to the combining entities. In reality as it is an intermediate parent, it may be exempt from preparing consolidated financial statements.
Example 4: Identifying the acquirer
Company A set up a new Company as a 100% subsidiary, Company B with the sole purpose to acquire a business/shares of another entity. Company A provides the funds to Company B to allow it to acquire the business and charges market interest. In this case the acquirer of the business is Company B and not Company A.
Example 5: Determining cost where control achieved in stages
In year 1 Company A acquired a 10% interest in Company B for CU10,000. In year 2 Company A acquired a further 50% interest for CU70,000 at which point it obtains control and therefore is a business combination.
The cost of the combination in this instance would be CU80,000 (CU70,000+CU10,000).
Example 6: Changes in contingent consideration – change in estimate
Company A acquires Company B at the start of year 1. The purchase price was CU1,000,000 and a further CU300,000 will be payable in three years time if the future profits remain at CU350,000 or a further CU370,000 if profits increase to CU450,000 for each of the four years.
At the start of year 1, in calculating the business combination cost, Company A would have to assess if it is probable that the company will maintain the profit level. If we assume that it is probable that the CU300,000 will be maintained and the CU450,000 will not be obtained. Then the present value of the CU300,000 should be recognised within goodwill as a cost of the business combination. Assume goodwill before accounting for the business combination is CU100,000 and the discount rate is 5%. Assume the amortisation of goodwill is 10 years.
The present value of CU300,000 in 3 years time is CU259,151 (CU300,000/(1.05)^3). Three years is used here as the fair value is determined at the date of acquisition. The deemed interest on the unwinding of the discount would be:
|
End of year 1: |
CU12,958 (CU259,151 X 5%) |
|
End of year 2: |
CU13,605 ((CU259,151 + CU12,958) X 5%) |
|
End of year 3: |
CU14,286 ((CU2591,51 + CU12,958 + CU13,605) X 5%) |
Therefore this CU259,151 will be added to goodwill i.e. Dr goodwill, Cr provisions. The posting for the unwinding of the discount at the end of year 1 would be to: Cr provision for contingent consideration CU12,958, Dr interest expense CU12,958.
Assume at the end of year 2 the company believes CU450,000 profits will be achieved in each of these years so the probable consideration to be paid is CU370,000. In this case the entity should use the discount rate at the end of year 2 to determine the present value however here as this is repayable within one year no discounting has been performed. The adjustment posted at the end of year 2 would be:
|
|
CU |
CU |
|
Dr Goodwill |
67,429*** |
|
|
Dr Amortisation of Goodwill on Adjustment in P&L |
16,857** |
|
|
Cr Provision for Contingent Consideration |
|
84,286* |
*Total carrying amount of provision at end of year 2 = CU259,151+interest for year 1 of CU12,958 + interest for year 2 of CU13,605= CU285,714.
The carrying amount of CU285,714 less the required provision based on the new estimate of CU370,000 = CU84,286
**Amortisation of additional goodwill = CU84,286/10yrs*2yrs as two years have elapsed= CU16,857
***Goodwill adjustment = CU84,286 less the amortisation of CU16,857 that would have been charged if this were recognised initially= CU67,429.
As can be seen no prior period adjustment is required as it is a change in accounting estimate.
In this case the company could also choose to amortise the updated goodwill figure over the remaining life instead of posting a catch up amortisation charge e.g. the new goodwill figure could be CU291,670.
Carrying amount of goodwill at end of year 2:
(CU259,151/10yrs X 8yrs) = CU207,321
Additional amount posted = CU84,286
CU291,607
This CU291,607 would then by depreciated over the remaining life of 8 years.
Example 7: Contingent consideration – No provision booked in year 1
If we assume in the above example that a reliable estimate cannot be measured at the date of acquisition and therefore no provision was posted but at the end of year 2 a reliable estimate of CU300,000 can be made. The adjustment required would be to:
|
|
CU |
CU |
|
Dr Goodwill |
217,687* |
|
|
Dr Amortisation of Goodwill on Adjustment in P&L |
54,422** |
|
|
Cr Provision for Contingent Consideration |
|
272,109*** |
*Goodwill adjustment = CU272,109 less the amortisation of CU27,211 that would have been charged if this were recognised initially= CU244,898.
**Amortisation of additional goodwill = CU272,109/10yrs*2yrs as two years have elapsed= CU54,422
***The present value of CU300,000 in 2 years time is CU272,109 (CU300,000/(1.05)^2). Two years is used here as the fair value is determined at the date of the change in estimate. If the discount rate was different at that time than the discount rate at the date of the initial acquisition the new discount rate would be used.
The entity can instead also choose to amortise the CU272,109 over the remaining 8 years from that date.
As can be seen no prior year adjustment is required as it is a change in accounting estimate.
Example 8: Valuing work in progress
Company A acquired Company B. As part of the assets acquired it included work in progress for bicycles with a cost in the acquire books at CU100,000. The selling price of these bikes when they are finished goods is CU300,000.
In the fair value exercise, the acquirer would need to determine how much extra it will cost to complete. This can be done by looking at the total costs it would be expected that Company B would incur to produce these bikes in full. Assume the total cost to complete is CU250,000, therefore a profit of CU50,000 would have been made.
In order to determine the fair value, the following calculation would be required to determine the profit allowance of CU20,000:
CU50,000 being the profit that would have been made * (CU150,000 being the costs incurred to date / CU250,000 being the total cost to produce the bikes) =CU30,000
Therefore the fair value of the WIP would be CU120,000 (CU300,000-CU150,000-CU30,000 being the profit element).
Example 9: Deferred revenue
Company A acquired Company B. Part of the net liabilities taken over was deferred revenue of CU40,000 for an outstanding service contract which has to be performed. In fair valuing this obligation Company A determines that another third party would take this outstanding contracts work on and would have charged CU35,000. Company A should include in the acquisition cost calculation the CU35,000 and not the CU40,000.
Example 10: Favorable/unfavorable contract
Company A acquired Company B. It has an operating lease on a property at an unfavorable rate. The market rent for a similar property in the area is CU6,000 per annum however the rate charged to Company B is CU10,000. This lease has 10 years to run. The provision to be recognised at acquisition date at its fair value is CU40,000 ((CU10,000-CU6,000)*10yrs). This CU40,000 increases the goodwill.
Each year CU4,000 will be released to the consolidated profit and loss.
The opposite would occur if an asset was to be recognised.
Example 11: Deferred tax on business combinations
Parent A acquired 100% of the ordinary shares of Company B for CU1,000,000. Assume the deferred tax rate is 10%. Assume deferred tax has been recognised correctly in the book amounts transferred. Details of the book value and fair value at the time of acquisition is detailed below:
|
|
Book value |
Fair value |
|
Property, Plant and Equipment |
CU300,000 |
CU550,000 |
|
Intangible Assets |
CUnil |
CU100,000 |
|
Inventory |
CU150,000 |
CU170,000 |
|
Cash |
CU100,000 |
CU100,000 |
|
Debtors |
CU20,000 |
CU25,000 |
|
Creditors |
(CU100,000) |
(CU100,000) |
|
Contingent Liabilities |
CU- |
(CU10,000) |
|
Deferred Tax |
(CU60,000) |
(CU86,500*) |
|
Total Net Assets |
CU410,000 |
CU748,500 |
|
Consideration |
|
CU1,000,000 |
|
Goodwill |
|
CU251,500 |
The deferred tax to be recognised on acquisition is:
|
Uplift in Property, Plant and Equipment |
CU150,000 |
|
Uplift in Intangible Assets |
CU100,000 |
|
Uplift in Inventory |
CU20,000 |
|
Uplift in Cash |
CUnil |
|
Uplift in Contingent Liabilities |
(CU10,000) |
|
Uplift in Debtors |
CU5,000 |
|
Uplift in Creditors |
CUnil |
|
Total Timing Difference |
CU265,000 |
Once the above exercise is completed management should assess the rate that the asset/liabilities are expected to be reversed. Here the debtors, inventory, contingent liability property, plant and equipment are going to be reversed during trading as they are trading assets. In relation to the intangible assets, if it is assumed these will be used throughout the trade and have little residual value then the trading rate should be used in measuring the deferred tax. The deferred tax liability to recognise as a result of the uplift in value is:
CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is = CU26,500+CU60,000=CU86,500
The journals required in the consolidated financial statements are:
|
|
CU |
CU |
|
Dr Goodwill |
251,500 |
|
|
Dr Net Assets of Company B |
748,500 |
|
|
Cr Investment in Company B in Parent Entity Balance Sheet |
|
1,000,000 |
From above it is evident that the additional liability for deferred tax has increased goodwill by the same amount. The deferred tax will be reduced as the differences reverses year on year (i.e. for PPE and intangibles in the period depreciation/amortisation is charged, for debtors when they are paid, for inventory when they are sold etc.). The deferred tax is reversed as depreciation/amortisation is charged and as the debtors/contingent liability is realised.
Note in the example above if there was a large residual value on the PPE, then it may be appropriate to recognise deferred tax at the sales rate for the value allocated to the residual amount and the remainder would be measured using the trading tax rate. This would then give a different answer for goodwill.
Example 11A: Deferred tax on a business contribution where net assets as opposed to shares are acquired.
If we assume the company acquired the trade (net assets) as opposed to the shares in the above example deferred tax would be still required to be recognised. In the entity accounts as the fair value would be included on the balance sheet. The journals will be:
|
|
CU |
CU |
|
Dr Net Asset at Fair Value |
248,500 |
|
|
Dr Goodwill |
251,500 |
|
|
Cr Bank |
|
1,000,000 |
Example 12: Subsequent adjustment to fair values at the acquisition date and amortisation of goodwill and fair value uplifts on acquisition
Company A acquired 100% of company B on 1 October 20X4. The year end for the financial statements is 31 December. When signing off the (consolidated where shares are acquired or entity where the net assets are acquired) financial statements, the company could not get a professional valuation for the property, plant and equipment within the time period. Therefore Company A estimated a fair value of CU100,000. Note the NBV of the PPE in the acquirees book was CU90,000 so deferred tax of CU1,000 was recognised on the uplift.
In addition Company A estimated the bad debt provision on the trade debtor balance and deemed the fair value of debtors to be CU10,000 which equaled the book value. The fair value of all assets and liabilities including the aforementioned was CU200,000. Goodwill at the date of acquisition was calculated at CU49,000. The total cost of the acquisition was CU250,000.
The useful life of goodwill was determined to be 10 years and the remaining life on the property, plant and equipment was 5 years. Assume deferred tax rate is 10%.
The profits made from 1 October to 31 December 20X4 was CU20,000.
In the 31 December 20X4 financial statements the following adjustments would be posted to the consolidated financial statements to reflect the goodwill on the acquisition date:
|
|
CU |
CU |
|
Dr Goodwill |
50,000 |
|
|
Dr Ordinary Share Capital and P&L Reserves** |
200,000 |
|
|
Cr Investment in the Parent Company Financial Statements** |
|
250,000 |
The below journal is required to recognise the deferred tax:
|
|
CU |
CU |
|
Dr Goodwill |
1,000 |
|
|
Cr Deferred Tax Liability on Fair Value Uplift above Book Value (CU10,000*10%) |
|
1,000 |
The below journal would be posted to recognise the depreciation on the uplift in PPE:
|
|
CU |
CU |
|
Dr Depreciation (CU10,000/5 years* 3/12th) |
500 |
|
|
Cr Accumulated Depreciation PPE |
|
500 |
The below journal would be posted to recognise the amortisation on goodwill:
|
|
CU |
CU |
|
Dr Amortisation |
1,225* |
|
|
Cr Accumulated Amortisation Goodwill |
|
1,225 |
*goodwill on recognition is CU50,000 less deferred tax of CU1,000=CU49,000/10yrs*3/12th being period 1 October to 31 December
**If the net assets were acquired (i.e. the trade and not the shares) the journal would be to:
|
|
CU |
CU |
|
Dr Net Assets |
200,000 |
|
|
Dr Goodwill |
50,000 |
|
|
Cr Bank |
|
250,000 |
On 1 February 20X5 (within the 12 month limit), Company A obtained the valuation for the PPE on the date of acquisition which was CU150,000. Following a review of the debtors acquired on acquisition at 31 August 20X5, evidence showed that the fair value at the date of acquisition was CU5,000 instead of the estimated CU10,000. The company is preparing the 31 December 20X5 consolidated financial statements.
Note a prior year adjustment is required here as the 12 month adjustment period straddles 2 accounting periods. The journals to be posted in the 20X4 accounts to show the prior year adjustment are:
|
|
CU |
CU |
|
Dr PPE (see note 1) |
47,500 |
|
|
Cr Debtors (see note 2) |
|
5,000 |
|
Dr Depreciation on PPE (see note 1) |
2,500 |
|
|
Cr Amortisation of Goodwill (See note 3) |
|
1,018 |
|
Cr Deferred Tax Liability (CU4,750-CU500) See note 1 and note 2 |
|
4,250 |
|
Cr Goodwill (See note 3) |
|
39,732 |
Being journal to reflect adjustment to reflect change in fair values within the 12 month period
|
Note 1: Fair value adjustment to PPE Updated fair value of PPE included in calculation of goodwill CU150,000 Initial fair value of PPE included in calculation of goodwill (CU100,000) Adjustment to be made to goodwill CU50,000 Additional depreciation that should have been charged from period 1 October to 31 December 20X4 (CU50,000/5yrs*3/12th) (CU2,500) Total adjustment to be made to PPE CU47,500 Deferred tax on net adjustment in PPE (CU47,500*10%) (CU4,750) Note 2: Fair value adjustment to debtors Updated fair value of debtors included in calculation of goodwill CU5,000 Initial fair value of debtors included in calculation of goodwill (CU10,000) Adjustment to be made to goodwill (CU5,000) Deferred tax on net adjustment in debtors (CU5,000*10%) CU500 Note 3: Adjustment to goodwill Adjustment to reflect updated PPE fair value CU50,000 Adjustment to reflect updated deferred tax (CU4,750-CU500) (CU4,250) Adjustment to reflect updated debtors fair value (CU5,000) Adjustment to goodwill cost CU40,750 Additional amortisation that should have been charged on goodwill from 1 October to 31 December 20X4 (CU40,750/10yrs useful life*3/12th) (CU1,018) Total adjustment to goodwill in 31 December 20X4 accounts – credit CU39,732 |
Note no deferred tax is recognised on goodwill as per Section 29
In the 20X5 consolidated financial statements the updated goodwill figure of CU89,750 (CU49,000+CU40,750) and PPE fair value figure of CU150,000 (CU90,000+CU10,000) will be amortised/depreciated.
Example 13: Journals to reflect the business combination
If we take example 11 above and assume only 80% of the company is acquired. The goodwill to be recognised in this instance is as follows:
Total net assets of CU748,500*80% being the % ownership= CU598,800. The total amount paid was CU1,000,000, therefore goodwill of CU393,200 should be recognised.
The journals required in the consolidated financial statements are:
|
|
CU |
CU |
|
Dr Goodwill |
401,200 |
|
|
Dr Net Assets of Company B |
748,500 |
|
|
Cr Investment in Company B in Parent Entity Balance Sheet |
|
1,000,000 |
|
Cr Non-controlling Interest (CU748,500*20%) |
|
149,700 |
Example 14: Revising the useful life of goodwill
In year 1 an goodwill was recognised on acquisition CU100,000. It had an estimated life of 10 years. Its estimated residual value was estimated to be nil. This useful life was assessed for indicators of change at each year end and there were no issues up to the end of year 4. At the start of year 5, due to a detailed assessment of the remaining lifes of goodwill, the useful life was reassessed at 4 years instead of 6 years at that time, the asset had a carrying amount as follows:
|
Cost |
CU100,000 |
|
Residual Value |
(-) |
|
Depreciable Amount |
CU100,000 |
|
Depreciation (100,000 / 10 yrs * 4 yrs) |
(CU40,000) |
|
Carrying Amount |
CU60,000 |
In year 5, the useful life was assessed as 4 years instead of 6 years (there were no issues with regard to impairment). Deducting amortisation charged to date of CU40,000 leaves CU60,000 to be amortised over the updated remaining useful life of 4 years. Therefore, amortisation of CU15,000 (CU60,000/4yrs) for the remaining four years. Disclosure of the change in estimate would be required in the financial statements detailing the effect on current and future years i.e. that the amortisation charge increased from CU10,000 to CU15,000 for the remaining years and the assets will be written down to nil in 4 years time as opposed to the original 6 years.
Example 15: Business combination achieved in stages
Company A acquired 5% of Company B for CU50,000 at the start of year 1. At the end of year 2 Company A acquired a further 30% for CU100,000 giving significant influence. At the end of year 3 a further 50% was acquired for CU110,000. At the time of the 50% acquisition the fair value of the net assets was CU200,000 which equaled the net asset value. The carrying amount of the associate holding on the consolidated balance sheet at the end of year 3 was CU170,000 being the net assets of Company B at that time (difference between CU150,000 cost and the CU170,000 is the profit share for the 3 years).
In this example we have ignored any profit earned since acquisition as an associate or amortisation of deemed goodwill when the company acquired significant influence.
Goodwill is calculated in accordance 19.11A as follows:
|
Cost of Acquisition of first 5% of Company B |
CU50,000 |
|
Cost of Acquisition of second 30% of Company B |
CU100,000 |
|
Cost of Acquisition of third 50% of Company B |
CU110,000 |
|
Total Cost of Investment on Acquiring Control |
CU260,000 |
|
Total Portion of the Fair Value of Company B Acquired on Obtaining Control at the End of Year 3 (CU200,000*(50%+30%+5%)) |
(CU170,000) |
|
Total Goodwill to be Recognised |
CU90,000 |
The journal required on acquisition of control at the end of year 3 is:
|
|
CU |
CU |
|
Dr Goodwill |
90,000 |
|
|
Dr Net Asset of Company B |
200,000 |
|
|
Dr Other Comprehensive Income |
20,000* |
|
|
Cr Associate Investment in Company B in Consolidated Balance Sheet |
|
170,000
|
|
Cr Bank |
|
110,000 |
|
Cr Non- Controlling Interest in Equity (CU200,000*15%) |
|
30,000 |
*this difference is the difference between the previous cash paid prior to obtaining control of CU150,000 and the share of the net assets at the date control is obtained of CU170,000. As it is not a profit or loss it is posted to OCI.
Example 16: Acquiring a further controlling interest
Parent A previously owned 55% of Company B which was consolidated in the financial statements. At the time of acquisition of the 55% its fair value of net assets was CU500,000 which was equal to book value. The purchase cost was CU300,000. The goodwill recognised was CU25,000 (CU500,000*55%=CU275,000-CU300,000). During the year the company acquired a further 25% from the non-controlling interest for CU220,000. The fair value of the net assets of Company B at the date of acquisition the additional 25% was CU800,000 (the NBV of the net assets was CU700,000). The carrying amount of the 45% non-controlling interest in the consolidated financial statements was CU250,000 at the date of purchase of the 25% interest.
The journals posted in the parent individual TB would be:
|
|
CU |
CU |
|
Dr Investment in Subsidiary |
220,000 |
|
|
Cr Bank |
|
220,000 |
The journals required to account for this transaction in the consolidated financial statements are:
|
|
CU |
CU |
|
Dr Equity -Profit and Loss Reserves (CU220,000-CU138,889) |
81,111 |
|
|
Dr Equity-Non Controlling Interest (CU250,000/45 being original amount owned by the minority interest *25 being the amount disposed of) |
138,889 |
|
|
Cr Investment in Subsidiary |
|
220,000 |
Being journal to reflect the acquisition as an equity transaction
Example 17: Acquiring a further controlling interest
Parent A previously owned 55% of Company B which was consolidated in the financial statements. During the year the company acquired the remaining 45% from the non-controlling interest for CU1,300,000. The non-controlling interest shown in the financial statements prior to the acquisition was CU1,000,000. The journals posted in the parent individual TB would be:
|
|
CU |
CU |
|
Dr Investment in Subsidiary |
1,300,000 |
|
|
Cr Bank |
|
1,300,000 |
The journals required to account for this transaction in the consolidated financial statements are:
|
|
CU |
CU |
|
Dr Equity -Profit and Loss Reserves (CU1,300,000 – CU1,000,000) |
300,000 |
|
|
Dr Equity-Non Controlling Interest |
1,000,000 |
|
|
Cr Investment in Subsidiary |
|
1,300,000 |
Being journal to reflect this as an equity transaction
Example 18: Disposing of controlling interest but controlling interest retained
Parent A previously owned 100% of Company B which was consolidated in the financial statements. During the year the company disposed of 25% to a third party for CU300,000. The original cost of the investment in the individual entity accounts was CU1,300,000. The net assets of the subsidiary at the date of disposal was CU800,000 plus goodwill of CU50,000 in the consolidated accounts.
The journals posted in the parent individual TB would be:
|
|
CU |
CU |
|
Dr Loss on Disposal |
25,000 |
|
|
Dr Bank |
300,000 |
|
|
Cr Investment in Subsidiary (CU1,300,000*25%) |
|
325,000 |
The journals required to account for this transaction in the consolidated financial statements are:
|
|
CU |
CU |
|
Dr Investment in Subsidiary |
300,000 |
|
|
Cr Equity -Profit and Loss Reserves (CU300,000-CU212,500) |
|
87,500 |
|
Cr Equity-Non Controlling Interest (CU850,000*25%) |
|
212,500 |
Being journal to reflect disposal as an equity transaction assuming usual goodwill journals were posted
Example 19: Negative goodwill
Company A acquired Company B for CU200,000 when the fair value of the net assets were CU250,000. In this instance there is negative goodwill of CU50,000. Ignore deferred tax effects. Assume the acquisition occurred at the start of year 1. Assume the negative goodwill attached to the inventory at the date of acquisition and this inventory will be utilised in the Company B over two years.
After a reassessment Company A is happy that this negative goodwill exists. Therefore the acquisition journals would be:
|
|
CU |
CU |
|
Dr Net Assets |
250,000 |
|
|
Cr Goodwill |
|
50,000 |
|
Cr Investment |
|
200,000 |
The journal required at the end of year 1 to recognise the amortisation of the negative goodwill is:
|
|
CU |
CU |
|
Dr Negative Goodwill |
25,000 |
|
|
Cr Amortisation of Negative Goodwill (CU50,000/2yrs*1yr of stock disposed of) |
|
25,000 |
Example 20: Group reorganisations
Company A who is a member of a group with Parent A, acquires Company B from Parent A on 1 March in return for the issuance of 100 CU1 ordinary shares for CU1,801 each i.e.CU180,100. This CU180,100 is equivalent to the net assets of Company B. Company A applies merger accounting and the year end is 31 December. The profit for the 9 month period to 31 December in Company B was CU20,000 and the profit made for the full year is CU60,000.
In the consolidated financial statements of Company A the following would be shown assuming the below results. Note the profit made for the full year is included, the date of acquisition is irrelevant. If in the below analysis, the nominal value of shares issued in Company B was less than the actual amount issued to Company B, the other reserve would be reduced to a negative by the difference and therefore on occasion there can be a debit balance in the other reserve.
The above example assumes shares were acquired, merger accounting can also apply when an entity acquires the trade and net assets as opposed to shares (i.e. the acquisition of a business in return for their issuance of shares in itself.) Applying this to the above example the journals would be:
|
|
CU |
CU |
|
|
Dr Net Assets |
180,100 |
|
|
|
Cr Ordinary Share Capital |
|
100 |
|
|
Cr Merger Reserve |
|
180,000 |
|
Example 21: Adjustments for deferred tax on business combinations prior to date of transition where transition exemption availed of
Parent A acquired 100% of the ordinary shares of Company B for CU1,000,000 on 1 January 2013. Assume the deferred tax rate is 10% and the date of transition is 1 January 2014. Assume deferred tax has been recognised correctly on the book amounts transferred.
Assume the deferred tax on the adjustments to reflect the fair value of the monetary assets reverses in the first year. Assume the amortisation on intangibles and PPE is over a period of 10 years from the date of acquisition.
Details of the book value and fair value at the time of acquisition is detailed below:
|
|
|
Old GAAP |
FRS 102 |
|
|
Book value |
Fair value |
Fair value |
|
Property, Plant and Equipment |
CU300,000 |
CU550,000 |
CU550,000 |
|
Intangible Assets |
CUnil |
CU100,000 |
CU100,000 |
|
Inventory |
CU150,000 |
CU170,000 |
CU170,000 |
|
Cash |
CU100,000 |
CU100,000 |
CU100,000 |
|
Debtors |
CU20,000 |
CU25,000 |
CU25,000 |
|
Creditors |
(CU100,000) |
(CU100,000) |
(CU100,000) |
|
Contingent Liabilities |
CU- |
(CU10,000) |
(CU10,000) |
|
Deferred Tax |
(CU60,000) |
(CU60,000*) |
(CU86,500*) |
|
Total Net Assets |
CU410,000 |
CU775,000 |
CU748,500 |
|
Consideration |
|
CU1,000,000 |
CU1,000,000 |
|
Goodwill |
|
CU225,000 |
CU251,500 |
The deferred tax to be recognised on acquisition under FRS 102, not recognised under old GAAP:
|
|
Date of Acquisition |
Book Amount at Date of Transition |
|
Uplift in Property, Plant and Equipment |
CU150,000 |
CU135,000** |
|
Uplift in Intangible Assets |
CU100,000 |
CU90,000** |
|
Uplift in Inventory |
CU20,000 |
CU0** |
|
Uplift in Cash |
CUnil |
N/a |
|
Uplift in Contingent Liabilities |
(CU10,000) |
CU0** |
|
Uplift in Debtors |
CU5,000 |
CU0** |
|
Uplift in Creditors |
CUnil |
CUN/a |
|
Total Timing Difference* |
CU265,000 |
CU225,000 |
|
Deferred Tax* |
CU26,500 |
CU22,500 |
*Once the above exercise is completed management should assess the rate that the asset/liabilities are expected to be reversed. Here the debtors, inventory, contingent liability property, plant and equipment are going to be reversed during trading as they are trading assets. In relation to the intangible assets, if it is assumed these will be used throughout the trade and have little residual value then the trade tax rate should be used in measuring the deferred tax and not the sales tax rate. The deferred tax liability to recognise as a result of the uplift in value at acquistion is:
CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is on the date of acquisition under FRS 102 = CU26,500+CU60,000=CU86,500
At date of transition is CU22,500 (CU225,000*10%)
**Carrying amount of fair value adjustment in the consolidated financial statements at date of acquisition is:
PPE = CU135,000 (CU150,000/10yrs*9yrs being the years left on the asset at date of transition).
Intangibles = CU90,000 (CU100,000/10yrs*9yrs being the years left on the asset at date of transition).
Other non-monetary assets is nil as it is assumed the difference has reversed.
Therefore the deferred tax which would have been recognised under FRS 102 was CU22,500.
The journals required on transition are:
On 1 January 2014
|
|
CU |
CU |
|
Dr Profit and Loss Reserves |
22,500 |
|
|
Cr Deferred Tax Liability |
|
22,500 |
Being journal to recognise the deferred tax on fair value differences at date of transition
Note goodwill is not adjusted instead profit and loss reserves is adjusted as Goodwill cannot be adjusted where the exemption is claimed.
Journals to be posted at 31 December 2014 assuming the above journal is posted to reserves:
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
2,500 |
|
|
Cr Deferred Tax in P&L ((CU150,000+CU100,000)/10yrs)*10%) |
|
2,500 |
Being journal to reflect the reversal of deferred tax to match depreciation posted on fair value differences in consolidated financial statements
Journals to be posted at 31 December 2015 assuming the above journal is posted to reserves:
The same journal will be required for 31 December 2015 as for 2014 above
Example 22: Adjustments to business combinations where it occurs after the date of transition
Parent A acquired 100% of the ordinary shares of Company B for CU1,000,000 on 2 January 2014. Assume the deferred tax rate is 10% and the date of transition is 1 January 2014. Assume deferred tax has been recognised correctly on the book amounts transferred. Assume the useful life of goodwill is 10 years.
Assume the deferred tax on the adjustments to reflect the fair value of the monetary assets reverses in the first year and the useful life of PPE is 10 years.
Details of the book value and fair value at the time of acquisition for Old GAAP and FRS 102 purposes is detailed below:
|
|
|
Old GAAP |
FRS 102 |
|
|
|
Book value |
Fair value |
Fair value |
Difference
|
|
Property, Plant and Equipment |
CU300,000 |
CU550,000 |
CU550,000 |
CUNil |
|
Intangible Assets |
CUnil |
CUnil |
CU100,000 |
(CU100,000) |
|
Inventory |
CU150,000 |
CU170,000 |
CU170,000 |
CUNil |
|
Cash |
CU100,000 |
CU100,000 |
CU100,000 |
CUNil |
|
Debtors |
CU20,000 |
CU25,000 |
CU25,000 |
CUNil |
|
Creditors |
(CU100,000) |
(CU100,000) |
(CU100,000) |
CUNil |
|
Contingent Liabilities |
CU- |
(CU10,000) |
(CU10,000) |
CUNil |
|
Deferred Tax |
(CU60,000) |
(CU60,000*) |
(CU86,500*) |
CU26,500 |
|
Total Net Assets |
CU410,000 |
CU675,000 |
CU748,500 |
(CU73,500) |
|
Consideration |
|
CU1,000,000 |
CU1,000,000 |
CUNil |
|
Goodwill |
|
CU325,000 |
CU251,500 |
CU73,500 |
Given the threshold for identifying intangible is not as stringent under FRS 102 as it does not have to be separable from goodwill, under FRS 102, intangibles of CU100,000 should have been recognised. Assume the useful life of intangibles is 5 years.
The deferred tax to be recognised on acquisition under FRS 102, not recognised under old GAAP:
|
Uplift in Property, Plant and Equipment |
CU150,000 |
|
Uplift in Intangible Assets |
CU100,000 |
|
Uplift in Inventory |
CU20,000 |
|
Uplift in Cash |
CUnil |
|
Uplift in Contingent Liabilities |
(CU10,000) |
|
Uplift in Debtors |
CU5,000 |
|
Uplift in Creditors |
CUnil |
|
Total Timing Difference |
CU265,000 |
|
Deferred Tax (CU265,000*10%)* |
CU26,500 |
*Once the above exercise is completed management should assess the rate that the asset/liabilities are expected to be reversed. Here the debtors, inventory, contingent liability property, plant and equipment are going to be reversed during trading as they are trading assets. In relation to the intangible assets, if it is assumed these will be used throughout the trade and have little residual value then the trade tax rate should be used in measuring the deferred tax and not the sales tax rate. The deferred tax liability to recognise as a result of the uplift in value is:
CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is = CU26,500+CU60,000=CU86,500
Adjustment required to the comparative financial statements:
At 31 December 2014
|
|
CU |
CU |
|
Dr Intangible Assets (CU100,000 less nil) |
100,000 |
|
|
Cr Goodwill (CU325,000-CU251,500) |
|
73,500 |
|
Cr Deferred Tax Liability (as above) |
|
26,500 |
Being journals required to post adjustments so as to show the correct fair values and goodwill under FRS 102
Journal for change in amortisation
|
|
CU |
CU |
|
|
|
|
|
Dr Amortisation of Intangibles in P&L*** |
20,000*** |
|
|
Dr Accumulated Amortisation of Goodwill |
7,350 |
|
|
Cr Accumulated Amortisation of Intangibles |
|
20,000 |
|
Cr Amortisation of Goodwill in P&L** |
|
7,350** |
Being journal to reflect reduction in goodwill amortisation and increase in intangible amortisation due to Old GAAP figures posted being different.
**The goodwill balance has decreased by CU73,500 under FRS 102 on acquistion. However under old GAAP the goodwill of CU325,000 was depreciated over 10 years so therefore depreciation of CU32,500 (CU325,000/10yrs) was charged in the old GAAP consolidated financial statements.
The amortisation that should have been charged under FRS 102 is = CU251,500/10yrs= CU25,150.
Therefore additional charge of CU7,350 (CU32,500-CU25,150) posted under old GAAP is to be reversed.
***The intangible balance has increased by CU100,000 under FRS 102 on acquisition which has to be amortised. However under old GAAP there was no intangible as it did not meet the definition for recognition. The amortisation that should have been charged under FRS 102 is = CU100,000/5yrs= CU20,000.
Therefore additional charge of CU20,000 (CU20,000-CUnil) to be posted under FRS 102 is to be recognised.
Journal for change in deferred tax
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
6,015 |
|
|
Cr Deferred Tax in P&L ((CU4,515 +CU1,500) |
|
6,015**** |
Being journal to reflect the reversal of deferred tax to match depreciation posted on fair value differences and release of monetary assets in the year in consolidated financial statements
****Reversal of the timing difference of inventory (CU20,000), contingent liability (CU10,000) and debtors (CU5,000) = (CU20,000-CU10,000+CU5,000)*10%= CU1,500
Reversal of the timing difference on fair value adjustment on PPE and intangibles for the depreciation/amortisation charge in the year = (CU25,150+CU20,000)*10%=CU4,515.
Adjustments required in the 31 December 2015 year end accounts assuming the above journals are posted into reserves where relevant:
The same type of journals would be posted for the amortisation/depreciation on intangible, goodwill and PPE in the 2015 as the 2014 year assuming consolidated financial statements have first been performed under old GAAP. Deferred tax of CU4,515 would only be posted as the monetary differences have been reduced to nil in the prior year.
If the intangible was allowed for tax purposes an adjustment may be required on the corporation tax computation for the tax deduction not previously allowable on goodwill. This deduction would be obtained in line with the tax transition rules issued by the tax authorities.
The above example assumes shares were acquired, the principals would be the same for a trade acquisition (when meets the definition of a business as per Section 19). Deferred tax may not be as applicable as it may have already have been provided or the intangible is allowed for capital allowance purposes with the deduction claimed being equal to the amortisation for the year.
Example 23: Adjustments to business combinations where it occurs before date of transition but exemption Section 35.10(a) not claimed
Parent A acquired 100% of the ordinary shares of Company B for CU1,000,000 on 1 January 2013. Assume the deferred tax rate is 10% and the date of transition is 1 January 2014. Assume deferred tax has been recognised correctly on the book amounts transferred. Assume the useful life of goodwill is 10 years.
Assume the deferred tax on the adjustments to reflect the fair value of the monetary assets reverses in the first year and the useful life of PPE is 10 years.
Details of the book value and fair value at the time of acquisition for old GAAP and FRS 102 purposes is detailed below:
|
|
|
Old GAAP |
FRS 102 |
|
|
|
Book value |
Fair value |
Fair value |
Difference |
|
Property, Plant and Equipment |
CU300,000 |
CU550,000 |
CU550,000 |
CUNil |
|
Intangible Assets |
CUnil |
CUnil |
CU100,000 |
(CU100,000) |
|
Inventory |
CU150,000 |
CU170,000 |
CU170,000 |
CUNil |
|
Cash |
CU100,000 |
CU100,000 |
CU100,000 |
CUNil |
|
Debtors |
CU20,000 |
CU25,000 |
CU25,000 |
CUNil |
|
Creditors |
(CU100,000) |
(CU100,000) |
(CU100,000) |
CUNil |
|
Contingent Liabilities |
CU- |
(CU10,000) |
(CU10,000) |
CUNil |
|
Deferred Tax |
(CU60,000) |
(CU60,000*) |
(CU86,500*) |
CU26,500 |
|
Total Net Assets |
CU410,000 |
CU675,000 |
CU748,500 |
(CU73,500) |
|
Consideration |
|
CU1,000,000 |
CU1,000,000 |
CUNil |
|
Goodwill |
|
CU325,000 |
CU251,500 |
CU73,500 |
Given the threshold for identifying intangibles is not as stringent under FRS 102 as it does not have to be separable from goodwill, under FRS 102, intangibles of CU100,000 should have been recognised. Assume the useful life of intangibles is 5 years.
The deferred tax to be recognised on acquisition under FRS 102, not recognised under old GAAP:
|
Uplift in Property, Plant and Equipment |
CU150,000 |
|
Uplift in Intangible Assets |
CU100,000 |
|
Uplift in Inventory |
CU20,000 |
|
Uplift in Cash |
CUnil |
|
Uplift in Contingent Liabilities |
(CU10,000) |
|
Uplift in Debtors |
CU5,000 |
|
Uplift in Creditors |
CUnil |
|
Total Timing Difference |
CU265,000 |
|
Deferred Tax (CU265,000*10%)* |
CU26,500 |
*Once the above exercise is completed management should assess the rate that the asset/liabilities are expected to be reversed. Here the debtors, inventory, contingent liability property, plant and equipment are going to be reversed during trading as they are trading assets. In relation to the intangible assets, if it is assumed these will be used throughout the trade and have little residual value then the trade tax rate should be used in measuring the deferred tax and not the sales tax rate. The deferred tax liability to recognise as a result of the uplift in value is:
CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is = CU26,500+CU60,000=CU86,500
Adjustment required:
At 1 January 2014
|
|
CU |
CU |
|
Dr Intangible Assets (CU100,000 less nil) |
100,000 |
|
|
Cr Goodwill (CU325,000-CU251,500) |
|
73,500 |
|
Cr Deferred Tax Liability (as above) |
|
26,500 |
Being journals required to post adjustments so as to show the correct fair values and goodwill under FRS 102
Journal for change in amortisation
|
|
CU |
CU |
|
Dr Amortisation of Intangibles in P&L Reserves*** |
20,000*** |
|
|
Dr Accumulated Amortisation of Goodwill |
7,350 |
|
|
Cr Accumulated Amortisation of Intangibles |
|
20,000 |
|
Cr Amortisation of Goodwill in P&L Reserves** |
|
7,350** |
Being journal to reflect reduction in goodwill amortisation and increase in intangible amortisation due to old GAAP figures posted being different up to the date of transition so that the correct NBV is shown.
**The goodwill balance has decreased by CU73,500 under FRS 102 on acquisition. However under old GAAP the goodwill of CU325,000 was amortised over 10 years so therefore amortisation of CU32,500 (CU325,000/10yrs) was charged in the old GAAP consolidated financial statements.
The amortisation that should have been charged under FRS 102 is = CU251,500/10yrs= CU25,150.
Therefore additional charge of CU7,350 (CU32,500-CU25,150) posted under old GAAP is to be reversed to profit and loss reserves for 1 year (being the period from the date of acquisition to the date of transition of 1 January 2014).
***The intangible balance has increased by CU100,000 under FRS 102 on acquisition which has to be amortised. However under old GAAP there was no intangible as it did not meet the definition for recognition. The amortisation that should have been charged under FRS 102 is = CU100,000/5yrs= CU20,000.
Therefore additional charge of CU20,000 (CU20,000-CUnil) to be posted under FRS 102 is to be reversed for 1 year (being the period from the date of acquisition of 1 January 2013 to the date of transition of 1 January 2014) to profit and loss reserves.
Journal for change in deferred tax
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
6,515 |
|
|
Cr Profit and Loss Reserves ((CU4,515+CU1,500) |
|
6,515**** |
Being journal to reflect the reversal of deferred tax to match depreciation posted on fair value differences and release of monetary assets in consolidated financial statements up to the date of transition
****Reversal of the timing difference of inventory (CU20,000), contingent liability (CU10,000) and debtors (CU5,000) = (CU20,000-CU10,000+CU5,000)*10%= CU1,500
Reversal of the timing difference on fair value adjustment on PPE and intangibles for the depreciation/amortisation charged in the year = (CU25,150+CU20,000)*10%=CU4,515.
Journals required to be posted at 31 December 2014 assuming the above journals are brought forward
Journal for change in amortisation
|
|
CU |
CU |
|
Dr Amortisation of Intangibles in P&L*** |
20,000*** |
|
|
Dr Accumulated Amortisation of Goodwill |
7,350 |
|
|
Cr Accumulated Amortisation of Intangibles |
|
20,000 |
|
Cr Amortisation of Goodwill in P&L** |
|
7,350** |
Being journal to reflect reduction in goodwill amortisation and increase in intangible amortisation due to old GAAP figures posted being different.
**The goodwill balance has decreased by CU73,500 under FRS 102 on acquistion. However under old GAAP the goodwill of CU325,000 was amortised over 10 years so therefore amortisation of CU32,500 (CU325,000/10yrs) was charged in the old GAAP consolidated financial statements.
The amortisation that should have been charged under FRS 102 is = CU251,500/10yrs= CU25,150.
Therefore additional charge of CU7,350 (CU32,500-CU25,150) posted under old GAAP is to be reversed.
***The intangible balance has increased by CU100,000 under FRS 102 on acquisition which has to be amortised. However under old GAAP there was no intangible as it did not meet the definition for recognition. The amortisation that should have been charged under FRS 102 is = CU100,000/5yrs= CU20,000.
Therefore additional charge of CU20,000 (CU20,000-CUnil) to be posted under FRS 102 is to be reversed.
Journal for change in deferred tax
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
4,515 |
|
|
Cr Deferred Tax in P&L |
|
4,515**** |
Being journal to reflect the reversal of deferred tax to match depreciation/amortisation posted on fair value differences in the year in consolidated financial statements not accounted for under old GAAP.
****Reversal of the timing difference on fair value adjustment on PPE and intangibles for the depreciation/amortisation charged in the year = (CU25,150+CU20,000)*10%=CU4,515.
Adjustments required in the 31 December 2015 year end accounts assuming the above journals are posted into reserves where relevant:
The same type of journals would be posted in the 2015 as the 2014 year assuming consolidated financial statements have first been performed under old GAAP.
If the intangible was allowed for tax purposes an adjustment may be required on the corporation tax computation for the tax deduction not previously allowable on goodwill. This deduction would be obtained in line with the tax transition rules issued by the tax authorities.
Example 24: Transition adjustment for goodwill previously determined infinite where Section 35.10(a) is claimed
Company A had goodwill with a carrying amount on transition of CU10,000. This was not previously amortised under old GAAP as it was deemed to have an infinite life. The useful life is now determined to be 10 years. Assume transition exemption 35.10(a) is claimed and the date of transition is 1 January 2014 and the goodwill was not previously allowed for tax purposes. Assume this is a UK entity which has early adopted the September 2015 amendments to FRS 102.
The adjustment to be recognised in the 31 December 2014 books is:
|
|
CU |
CU |
|
Dr Goodwill Amortisation |
CU1,000 |
|
|
Cr Goodwill Accumulated Amortization (CU10,000/10yrs being remaining UEL) |
|
CU1,000 |
Being journal to recognise amortisation on goodwill as under old GAAP it was considered infinite.
The same journal will be required in the 31 December 2015 TB and the above journal should be posted to the profit and loss reserve. Where goodwill was allowed for capital allowance/tax purposes deferred tax would need to be accounted for and on the adjustment claimed in the tax computation in line with the tax transition rules. This will dictate when the deferred tax will reverse.
Example 25: Transition adjustment for goodwill where previously used the default life 20 years where Section 35.10(a) is claimed
Company A had goodwill with a carrying amount on transition of CU10,000. This was previously amortised under old GAAP at the default rate of 20 years. There are 15 years remaining at the date of transition. If in the unlikely event that the remaining useful life cannot be justified and a life cannot be determined then the default rate under FRS 102 of 10 years should be used (5 year in Ireland until the EU directive is enacted and 5 year for UK entities who have not early adopted the September 2015 FRS 102 amendments). The useful life is now determined to be 10 years. Assume transition exemption 35.10(a) is claimed, the date of transition is 1 January 2014 and the UK entity has early adopted the September 2015 FRS 102 amendments.
The adjustment to be recognised in the 31 December 2014 books is:
|
|
CU |
CU |
|
Dr Goodwill Amortisation |
500 |
|
|
Cr Goodwill Accumulated Amortisation |
|
500* |
Being journal to recognise the additional amortisation on goodwill required under FRS 102.
*under old GAAP the amortisation charge for 2014 would have been CU500 (CU10,000/20yrs).
On transition to FRS 102, the life was determined to be 10 years by default. Therefore the amortisation should have been CU1,000 (CU10,000/10yrs). Therefore an adjustment is required in 31 December 2014 to increase the charge by CU500.
The same journal will be required in the 31 December 2015 TB.
If in the above example the remaining useful life of goodwill was less than 10 years then it may be appropriate to use the lower useful life. If this was an Irish entity or a UK entity which has not early adopted the September 2015 FRS 102 amendments a default rate of 5 years should be used in the example above. Where goodwill was allowed for capital allowance/tax purposes deferred tax would need to be accounted for and on the adjustment claimed in the tax computation in line with the tax transition rules. This will dictate when the deferred tax will reverse.
Example 26: Extract from the Accounting policy notes in the consolidated financial statements (excluding negative goodwill)
Basis of consolidation
The Group financial statements reflect the consolidation of the results, assets and liabilities of the parent undertaking, the Company and all of its subsidiaries, together with the Group’s share of profits/losses of associates and joint ventures. Where a subsidiary, associate or joint venture is acquired or disposed of during the financial year, the Group financial statements include the attributable results from, or to, the effective date when control passes, or, in the case of associates, when significant influence is lost.
Subsidiary undertakings
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
The acquisition method of accounting is used to account for business combinations by the Group. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are capitalised with the cost of the investment. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition by acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.
The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the group’s share of identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised as negative goodwill on the balance sheet and amortised through the profit and loss account in the period in which the non-monetary assets are recovered.
Associates and joint ventures
Associates are those entities in which the Group has significant influence over, but not control of, the financial and operating policies. Joint ventures are those entities over which the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic, financial and operating decisions. Investments in associates and joint ventures are accounted for using the equity method of accounting.
Under the equity method of accounting, the Group’s share of the post-acquisition profits or losses of its associates and joint ventures is recognised in the income statement. The income statement reflects, in profit before tax, the Group’s share of profit after tax of its associates and joint ventures in accordance with Section 14 of FRS102, ‘Investments in Associates’ and Section 15 of FRS 102, ‘Interests in Joint Ventures’. The Group’s interest in their net assets is included as investments in associates and joint ventures in the Group Statement of Financial Position at an amount representing the Group’s share of the fair value of the identifiable net assets at acquisition plus the Group’s share of post acquisition retained income and expenses. The Group’s investment in associates and joint ventures includes goodwill on acquisition. The amounts included in the financial statements in respect of the post acquisition income and expenses of associates and joint ventures are taken from their latest financial statements prepared up to their respective year ends together with management accounts for the intervening periods to the Group’s year end. The fair value of any investment retained in a former subsidiary is regarded as a cost on initial recognition of an investment in an associate or joint venture. Where necessary, the accounting policies of associates and joint ventures have been changed to ensure consistency with the policies adopted by the Group.
Transactions eliminated on consolidation
Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the Group financial statements. Unrealised gains and income and expenses arising from transactions with associates and joint ventures are eliminated to the extent of the Group’s interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that they do not provide evidence of impairment.
Business combinations and goodwill
All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries, associates and joint ventures. In respect of acquisitions that have occurred since XXXXX (INSERT DATE OF TRANSITION WHERE SECTION 35.10(A) EXEMPTION IS CLAIMED), goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, i.e. original cost less accumulated amortisation from the date of acquisition up to XXXXX, which represents the amount recorded under UK and Irish GAAP. Goodwill is now stated at cost or deemed cost less any accumulated amortisation and impairment losses. In respect of associates and joint ventures, the carrying amount of goodwill is included in the carrying amount of the investment.
Goodwill
Positive goodwill acquired on each business combination is capitalised, classified as an asset on the balance sheet and amortised on a straight line basis over its useful life of 10 years. Goodwill acquired in a business combination is, from the date of acquisition, allocated to each cash generating unit that is expected to benefit from the synergies of the combination. If an investment is disposed of any unamortised goodwill is subsumed within goodwill in the profit and loss on sale on discontinuance. Useful life is determined by reference to the period over which the values of the underlying businesses are expected to exceed the values of their identifiable net assets.
Goodwill is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable.
Negative goodwill represents the fair value of net assets on acquisition in excess of the fair value of consideration. Negative goodwill is capitalised and amortised through the profit and loss account in the period in which the non-monetary assets are recovered. In the case of fixed assets acquired, this is the period over which they are depreciated and in the case of stocks it is the period over which they are sold or otherwise realised.
Impairment
The carrying amounts of the Group’s/Company’s assets, other than inventories (which are carried at the lower of cost and net realisable value), deferred tax assets (which are recognised based on recoverability), investment properties (which are carried at fair value), and those financial instruments, which are carried at fair value, are reviewed to determine whether there is an indication of impairment when an event or transaction indicates that there may be. If any such indication exists, an impairment test is carried out and the asset is written down to its recoverable amount.
The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Value in use is defined as the present value of the future pre-tax and interest cash flows obtainable as a result of the asset’s continued use. The pre-tax and interest cash flows are discounted using a pre-tax discount rate that represents the current market risk free rate and the risks inherent in the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).
An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. An impairment loss is recognised in the profit and loss account, unless the asset has been revalued when the amount is recognised in other comprehensive income to the extent of any previously recognised revaluation. Thereafter any excess is recognised in profit or loss.
Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then, to reduce the carrying amount of the other assets in the unit on a pro rata basis.
An impairment loss, other than in the case of goodwill, is reversed if there has been a change in the estimates used to determine the recoverable amount. If an impairment loss is subsequently reversed, the carrying amount of the asset (or asset’s cash generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the revised carrying amount does not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised in prior periods. A reversal of an impairment loss is recognised in the profit and loss account.
Intangible assets
Intangible assets acquired as part of a business combination are initially recognised at fair value being their deemed cost as at the date of acquisition. These generally include brand and customer related intangible assets. Computer software that is not an integral part of an item of computer hardware is also classified as an intangible asset. Where intangible assets are separately acquired, they are capitalised at cost. Cost comprises purchase price and other directly attributable costs.
Intangible assets with finite lives are amortised over the period of their expected useful lives in equal annual instalments, as follows;
Brands 5 to 10 years
Customer related 5 to 20 years
Supplier agreements 4 to 10 years
Computer related 3 to 7 years
Subsequent to initial recognition, intangible assets are stated at cost less accumulated amortisation and impairment losses incurred.
The company’s policy is to review the remaining economic lives and residual values of intangible assets on an on-going basis and to adjust the amortisation charge to reflect the remaining estimated life where applicable and residual value where indicators of a change are present.
Contingent acquisition consideration
Any contingent consideration to be transferred by the group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with Section 21. Any adjustments to the estimated contingent consideration are accounted for as an adjustment to goodwill as a current period adjustment as it reflects a change in estimate and the adjusted goodwill is amortised from that date. Contingent consideration that is classified as equity is not remeasured and its subsequent settlement is accounted for within equity. To the extent that contingent acquisition consideration is payable after more than one year from the date of acquisition, it is discounted at an appropriate loan interest rate and, accordingly, carried at net present value on the Balance Sheet. An appropriate interest charge, at a constant rate on the carrying amount adjusted to reflect market conditions, is reflected in the Profit and Loss over the earnout period, increasing the carrying amount so that the obligation will reflect its settlement at the time of maturity.
Example 27: Extract from notes to the financial statements – Business combination and financial asset note in the consolidated financial statements
Business combinations
On the XX December 20X4 the company acquired 70% of the voting rights of XYZ Limited for a total consideration of CU1,000,000. XYZ manufacturers agricultural equipment. The useful life of the goodwill acquired is 10 years which is consistent with industry norms and the business acquired.
(i) The net assets of the company at that date were as follows:
|
|
Book value on Acquisition |
Fair value Adjustments |
Fair value on Acquisition |
|
|
CU |
CU |
CU |
|
Investments |
XXXXX |
– |
XXXXX |
|
Tangible fixed assets |
XXXXX |
(XXXXX) |
XXXXX |
|
Stock |
XXXXX |
– |
XXXXX |
|
Cash at bank and in hand |
XXXXX |
– |
XXXXX |
|
Debtors |
XXXXX |
– |
XXXXX |
|
Creditors |
(XXXX) |
– |
(XXXX) |
|
Provisions |
(XXXX) | – | (XXXX) |
|
|
XXXXX |
(XXXXXX) |
XXXXX |
|
Provisional fair value attributable to non-controlling interest |
|
(XXXXX) |
|
|
Provisional fair value attributable to group (70%) |
|
|
2,010,000 |
|
Consideration for acquisition (see (ii) below) |
|
|
(1,000,000) |
|
Directly attributable acquisition costs |
(10,000) |
||
|
Positive Goodwill |
|
|
1,000,000 |
(ii) The split of the consideration for the acquisition is as follows:
|
Cash |
|
|
XXXXX |
|||||
|
Equity instruments |
|
|
XXXXX |
|||||
|
Debt instruments |
|
|
XXXXX |
|||||
|
Total consideration |
|
|
1,000,000 |
|||||
|
Financial assets |
|
Joint Venture and associates |
Other investments |
Total |
|
|||
|
|
|
CU |
CU |
CU |
|
|||
|
Cost |
|
|
|
|
|
|||
|
At 1 January |
|
XXX |
XXX |
XXX |
|
|||
|
Additions |
|
XXX |
XXX |
XXX |
|
|||
|
Fair value adjustments |
|
XXX |
– |
XXX |
|
|||
|
Disposals |
|
– | – | (XXX) |
|
|||
|
At 31 December 2015 |
|
XXX | XXX | XXX |
|
|||
|
Amounts provided: |
|
|
|
|
|
|||
|
At 1 January 2015 |
|
XXX |
XXX |
XXX |
|
|||
|
Additional provision |
|
– | – | XXX |
|
|||
|
At 31 December 2015 |
|
XXX | XXX | XXX |
|
|||
|
|
|
|
|
|
|
|||
|
Carrying amount |
|
|
|
|
|
|||
|
At 31 December 2015 |
|
XXXX |
XXXX |
XXXX |
|
|||
|
|
|
|
|
|
|
|||
|
At 31 December 2014 |
|
XXXX |
XXXX |
XXXX |
|
|||
(a) Investment in associates and joint ventures are stated at cost less impairment. Other investments are measured at fair value based on the quoted share prices.
(b) Details of investments in which the parent Company holds 20% or more of the nominal value of any class of share capital are as follows:
|
Name and Registered Office |
Nature of Business |
Nature of Shares Held |
% of Share Class Held |
|
|
|
|
|
|
Subsidiary undertakings |
|
|
|
|
(i) XXXX Limited Address 1, Address 2
|
Machinery Manufacturing |
Ordinary share capital |
100%
|
|
This investment has been fully provided against.
|
|
||
|
(ii) XXXX Limited Address 1, Address 2
|
Patent holding company |
Ordinary share capital |
100% |
|
Associate |
|
|
|
|
(iii) XXXX Limited Address 1, Address 2
|
Machinery Manufacturing |
Ordinary share capital |
25%
|
|
Joint Venture |
|
|
|
|
(iv) XXXX Limited Address 1, Address 2
|
Machinery Manufacturing |
Ordinary share capital |
50%
|
Example 28: Extract from notes to the financial statements – contingent consideration note
|
Deferred consideration |
2015 |
2014 |
|
|
CU |
CU |
|
At 1 January |
XXX |
– |
|
Charge for year |
– |
XXXX |
|
Utilised in the year |
(XXX) | – |
|
Provision carried at 31 December |
100,000 |
90,000 |
|
|
|
|
|
|
2012 |
2011 |
|
|
CU |
CU |
|
Split as follows: |
|
|
|
Amounts falling due within one year (note 10) |
40,000 |
45,000 |
|
Amounts falling due after one year (note 11) |
60,000 |
45,000 |
|
|
100,000 |
90,000 |
Deferred consideration of CUXXX is payable upon the achievement of certain minimum targets arising in respect of an asset/SHARE purchase agreement entered into by the company in XXXXX. This provision represents the minimum amount which is reasonably expected to be paid under the terms of the asset/SHARE purchase agreement. The provision is not discounted due to materiality.
Example 29: Extract from accounting policy notes to the financial statements for the parent entity financial statements and for an entity that holds a subsidiary, associate or joint venture interest but is not required to prepare consolidated financial statements
Financial assets
Financial assets in subsidiaries and other financial fixed assets are stated at cost less provision for any diminution in value.
AND/OR
The company has adopted a policy of measuring investments in financial assets which can be reliably measured at their fair value, with changes in the fair value recognised in the profit and loss.
AND/OR
Financial assets which can be reliably measured are measured at their fair value, with changes in the fair value recognised in other comprehensive income and the revaluation reserve.
Dividend income
Dividend income from subsidiaries is recognised when the Company’s right to receive payment has been established
Goodwill
Positive goodwill acquired on each business combination is capitalised, classified as an asset on the balance sheet and amortised on a straight line basis over its useful life of 10 years. Goodwill acquired in a business combination is, from the date of acquisition, allocated to each cash generating unit that is expected to benefit from the synergies of the combination. If an investment is disposed of any unamortised goodwill is subsumed within goodwill in the profit and loss on sale on discontinuance. Useful life is determined by reference to the period over which the values of the underlying businesses are expected to exceed the values of their identifiable net assets.
Goodwill is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable.
Negative goodwill represents the fair value of net assets on acquisition in excess of the fair value of consideration. Negative goodwill is capitalised and amortised through the profit and loss account in the period in which the non-monetary assets are recovered. In the case of fixed assets acquired, this is the period over which they are depreciated and in the case of stocks it is the period over which they are sold or otherwise realised.
Intangible assets
Intangible assets acquired as part of a business combination are initially recognised at fair value being their deemed cost as at the date of acquisition. These generally include brand and customer related intangible assets. Computer software that is not an integral part of an item of computer hardware is also classified as an intangible asset. Where intangible assets are separately acquired, they are capitalised at cost. Cost comprises purchase price and other directly attributable costs.
Intangible assets with finite lives are amortised over the period of their expected useful lives in equal annual instalments, as follows;
Brands 5 to 10 years
Customer related 5 to 20 years
Supplier agreements 4 to 10 years
Computer related 3 to 7 years
Subsequent to initial recognition, intangible assets are stated at cost less accumulated amortisation and impairment losses incurred.
The company’s policy is to review the remaining economic lives and residual values of intangible assets on an on-going basis and to adjust the amortisation charge to reflect the remaining estimated life where applicable and residual value where indicators of a change are present.
Contingent acquisition consideration
Any contingent consideration to be transferred by the group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with Section 21. Any adjustments to the estimated contingent consideration are accounted for as an adjustment to goodwill as a current period adjustment as it reflects a change in estimate and the adjusted goodwill is amortised from that date. Contingent consideration that is classified as equity is not remeasured and its subsequent settlement is accounted for within equity. To the extent that contingent acquisition consideration is payable after more than one year from the date of acquisition, it is discounted at an appropriate loan interest rate and, accordingly, carried at net present value on the Balance Sheet. An appropriate interest charge, at a constant rate on the carrying amount adjusted to reflect market conditions, is reflected in the Profit and Loss over the earnout period, increasing the carrying amount so that the obligation will reflect its settlement at the time of maturity.
Example 30: Extract from notes to the financial statements for the for an entity that holds intangibles/goodwill
|
Intangible assets |
|
|
|
|
|
CU |
|
Cost |
|
|
|
At 1 January and 31 December |
|
300,000 |
|
Amortisation |
|
|
|
At 1 January |
|
100,000 |
|
Amortised to profit and loss account |
|
75,000 |
|
At 31 December |
|
175,000 |
|
Net book amount |
|
|
|
At 31 December 2015 |
|
115,000 |
|
|
|
|
|
At 31 December 2014 |
|
200,000 |
The intangible asset represents the purchased goodwill arising in respect of an asset purchase agreement with XXXXXXXXXX Limited. This amount represents the minimum amount which the directors consider is reasonably expected to be paid, and includes both the initial consideration paid and a deferred consideration element which is payable upon the achievement of certain minimum targets (see note XX).
Example 31: Extract from notes to the financial statements for the for an entity that holds an associate/subsidiary/joint venture/other interest but is not required to prepare consolidated financial statements – Financial asset note
|
Financial assets |
|
Subsidiary Undertakings |
Joint Venture and associates |
Other investments |
Total |
|
|
|
CU |
CU |
CU |
CU |
|
Cost |
|
|
|
|
|
|
At 1 January 2015 |
|
XXX |
XXX |
XXX |
XXX |
|
Additions |
|
XXX |
XXX |
XXX |
XXX |
|
Disposals |
|
(XXX) |
– |
– |
(XXX) |
|
At 31 December 2015 |
|
XXX |
XXX |
XXX |
XXX |
|
Amounts provided: |
|
|
|
|
|
|
At 1 January 2015 |
|
XXX |
XXX |
XXX |
XXX |
|
Additional provision |
|
XXX |
– |
– |
XXX |
|
At 31 December 2015 |
|
XXX |
XXX |
XXX |
XXX |
|
Carrying amount |
|
|
|
|
|
|
At 31 December 2015 |
|
XXXX |
XXXX |
XXXX |
XXXX |
|
At 31 December 2014 |
|
XXXX |
XXXX |
XXXX |
XXXX |
(a) Details of investments in which the parent Company holds 20% or more of the nominal value of any class of share capital are as follows:
|
Name and Registered Office |
Nature of Business |
Nature of Shares Held |
% of Share Class Held |
Net Assets/ (Liabilities) |
Results for year |
|||
|
|
|
|
|
CU |
CU |
|||
|
Subsidiary undertakings |
|
|
|
|
|
|||
|
(v) XXXX Limited Address 1, Address 2
|
Machinery Manufacturing |
Ordinary share capital |
100%
|
XXXX |
XXXX |
|||
|
This investment has been fully provided against. |
|
|
|
|||||
|
(vi) XXXX Limited Address 1, Address 2
|
Patent holding company |
Ordinary share capital |
100% |
XXX |
XXXX |
|||
|
Associate |
|
|
|
|
|
|||
|
(vii) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
25%
|
XXXX |
XXXX |
|||
|
Joint Venture |
|
|
|
|
|
|||
|
(viii) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
50%
|
XXXX |
XXXX |
|||
|
Intangible assets |
|
|
||||||
|
|
CU |
|
||||||
|
Cost |
|
|
||||||
|
At 1 January and 31 December |
300,000 |
|
||||||
|
Amortisation |
|
|
||||||
|
At 1 January |
150,000 |
|
||||||
|
Amortised to profit and loss account |
75,000 |
|
||||||
|
At 31 December |
225,000 |
|
||||||
|
Net book amount |
|
|
||||||
|
At 31 December 2015 |
75,000 |
|
||||||
|
At 31 December 2014 |
150,000 |
|
||||||
The intangible asset represents the purchased goodwill arising in respect of an asset purchase agreement with XXXX Limited. This amount represents the minimum amount which the directors consider is reasonably expected to be paid, and includes both the initial consideration paid and a deferred consideration element which is payable upon the achievement of certain minimum targets (see note XX).
Example 32: Extract from the profit and loss account for an entity which is not a parent that holds an investment in a subsidiary, associate/joint venture or an entity that is a parent but consolidated financial statements are not required to be prepared where income is received from an associate/joint venture/subsidiary
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Turnover |
– |
– |
|
|
|
|
|
Cost of sales |
(XXX) |
(XXX) |
|
Gross profit |
– |
– |
|
Administrative expenses |
(XXX) |
– |
|
Operating loss |
(XXX) |
– |
|
Income from shares in group undertakings |
XXXX |
– |
|
Income from participating interests |
XXXX |
– |
|
Income from other financial assets |
XXXX |
– |
|
Interest payable |
(XXX) |
(XXX) |
|
Profit/(loss) for the financial year |
86,442 |
(22) |
Example 33: Extract from the notes in the consolidated/entity financial statements – negative goodwill
|
Intangible fixed assets |
|
|
|
CU |
|
Negative goodwill |
|
|
Cost |
|
|
At 1 January |
– |
|
Arising during period (see (i) below) |
1,000,000 |
|
At 31 December |
1,000,000 |
|
|
|
|
Amortisation |
|
|
At 1 January |
– |
|
Amortised for the period |
(10,000) |
|
At 31 December |
(10,000) |
|
|
|
|
Net book value |
|
|
At 31 December 2014 |
– |
|
At 31 December 2015 |
990,000 |
(i) Negative goodwill arose on the change in controlling interest in XYZ Limited. On XX January XXXX XYZ Limited entered into an agreement to buy back and cancel 1,000 ordinary shares from the former shareholder for CU2,000,000. As a result XYZ Limited’s percentage shareholding increased from 20% to 70% making XYZ Limited a subsidiary of Parent Limited from that date. Negative goodwill has been allocated toward the cost of inventory and is being released over the period of in which the inventory is utilised.
(ii) The net assets of the company at that date were as follows:
|
|
Book value on Acquisition |
Fair value Adjustments |
Fair value on Acquisition |
|
|
CU |
CU |
CU |
|
Investments |
XXXXX |
– |
XXXXX |
|
Tangible fixed assets |
XXXXX |
(XXXXX) |
XXXXX |
|
Stock |
XXXXX |
– |
XXXXX |
|
Cash at bank and in hand |
XXXXX |
– |
XXXXX |
|
Debtors |
XXXXX |
– |
XXXXX |
|
Creditors |
(XXXX) |
– |
(XXXX) |
|
Provisions |
(XXXX) |
– |
(XXXX) |
|
|
XXXXX |
(XXXXXX) |
XXXXX |
|
Provisional fair value attributable to non-controlling interest |
|
(XXXXX) |
|
|
Provisional fair value attributable to group (70%) |
|
|
1,210,000 |
|
Original investment |
|
|
(100,000) |
|
Acquisition costs |
|
|
(10,000) |
|
Negative goodwill |
|
|
1,000,000 |
Example 34: Extract from the consolidated Balance Sheet for negative goodwill
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Fixed assets |
|
|
|
Tangible assets |
XXXX |
XXXX |
|
Negative goodwill |
(XXXX) |
– |
|
Financial assets |
XXXX |
XXXX |
|
|
XXXX |
XXXX |
|
Current assets |
|
|
|
Stocks |
XXXXX |
XXXXX |
|
Debtors |
XXXXX |
XXXXX |
|
Cash at bank and on hand |
XXXX |
XXXX |
|
|
XXXXX |
XXXXX |
|
Creditors – amounts falling due within one year |
(XXXXX) |
(XXXXX) |
|
|
|
|
|
Net current assets |
XXXXX |
XXXX |
|
Total assets less current liabilities |
XXXXX |
XXXXX |
|
|
|
|
|
Creditors – amounts falling due after more than one year |
(XXXX) |
(XXXX) |
|
|
|
|
|
Provisions for liabilities |
|
|
|
Capital grants |
(XXXX) |
(XXXX) |
|
Deferred taxation |
(XXXX) |
(XXXX) |
|
Net assets excluding pension liability |
XXXXX |
XXXXX |
|
|
|
|
|
Defined benefit pension liability |
(XXXXX) |
(XXXXX) |
|
Net assets including pension liability |
XXXXXX |
XXXXXX |
|
|
|
|
|
Capital and reserves |
|
|
|
Share capital |
XXXXX |
XXXXX |
|
Profit and loss account |
XXXXX |
XXXXX |
|
Equity attributable to owners of the parent company |
XXXXX |
XXXXX |
|
|
|
|
|
Non-controlling interest |
XXXXX |
XXXXX |
|
|
XXXXX |
XXXXX |
Example 35: Extract from the accounting policy notes – Group reconstruction and merger accounting
Subsidiary undertakings
Where a business combination arises as a result of a group restructuring, these combinations are accounted for under the merger method. No goodwill in recognised on acquisition instead the assets, liabilities and results are incorporated at the book value of the acquiree. The results and cash flows of all the combining entities are brought into the financial statements of the group from the beginning of the financial year in which the combination occurred, adjusted so as to achieve uniformity of accounting policies. The comparative information are restated by including the total comprehensive income for all the combining entities for the previous reporting period and their statement of financial position for the previous reporting date, adjusted as necessary to achieve uniformity of accounting policies.
The difference, if any, between the nominal value of the shares issued plus the fair value of any other consideration given, and the nominal value of the shares received in exchange is shown as a movement on other reserves in the consolidated financial statements. Any existing balances on the share premium account or capital redemption reserve of the new subsidiary is brought in by being shown as a movement on other reserves. These movements are shown in the statement of changes in equity. Merger expenses are not included as part of this adjustment.
Example 36: Extract from notes to the financial statements – Merger Method
On the XX September 20X4, the company acquired 100% of the ordinary shares of XYZ Limited for CUXXXXX in return for the issuance of 100,000 CU1 ordinary shares to its shareholders/parent Company. This acquisition was accounted for under the merger method.
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