IFRS 3- Groups of Entities (D-1.1)

IFRS 3 Purchase Consideration

Step-by-Step Actions with Examples

1. Fair Value Measurement of Previous Interest
   • Action: If the acquirer previously held an interest in the acquired entity, re-measure this interest to its fair value at the date of acquisition. Any resulting gain or loss is recognized in the statement of profit or loss.
   • Example: Company A held a 20% stake in Company B, carried at $500,000. At acquisition, the 20% stake’s fair value is $600,000.
     • Gain Calculation: $600,000 (fair value) - $500,000 (carrying amount) = $100,000 gain.
     • Recognition: The $100,000 is recognized as a gain in the profit or loss statement.

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2. Inclusion of Contingent Consideration
   • Action: Recognize contingent consideration at its fair value at the acquisition date, regardless of the likelihood of payment.
   • Example: Company X agrees to pay $2m if specific performance targets are achieved. The discounted present value is calculated using a discount rate of 8%.
     • Fair Value Calculation:
       $\text{Present Value} = \frac{\text{Future Payment}}{(1 + r)^n}$, where $r = 0.08$, $n = 1$.
       If $2m is payable in 1 year,
       $\frac{2,000,000}{1.08} = 1,851,851$.
     • Recognition: Add $1.85m to the immediate consideration.

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3. Changes in Contingent Consideration
   • Action: Post-acquisition changes in contingent consideration classified as liabilities are recognized in profit or loss. If contingent consideration is equity, it is not re-measured.
   • Example:
     • Original liability fair value: $1.5m.
     • Revised liability: $1.8m due to improved performance.
     • Recognition: The $300,000 increase is recognized as an expense in the profit or loss statement.

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4. Exclusion of Transaction Costs
   • Action: Expense transaction costs as incurred, rather than including them in the acquisition price.
   • Example:
     • Legal fees: $50,000.
     • Advisor fees: $30,000.
     • Recognition: $80,000 is expensed immediately in the profit or loss statement.

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5. Accounting for Bargain Purchase
   • Action: Record any gain from a bargain purchase (negative goodwill) directly in the statement of profit or loss.
   • Example:
     • Consideration paid: $2m.
     • Fair value of net assets acquired: $2.5m.
     • Gain Calculation: $2.5m - $2m = $0.5m.
     • Recognition: The $500,000 gain is recorded in the profit or loss statement.

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6. Employee Share-Based Payments
   • Action: Differentiate between share-based payments that are part of the purchase consideration and those compensating for future services.
   • Example:
     • Employees of the acquired company receive shares worth $1m.
     • $600,000 relates to past services (purchase consideration).
     • $400,000 relates to future services (expense over the vesting period).
     • Recognition:
       • $600,000 included in purchase consideration.
       • $400,000 expensed over the vesting period.

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Comprehensive Example

Scenario:
Company Y acquires 100% of Company Z for $10m.

• $8m paid immediately.
• $2m contingent on achieving $5m revenue in 2 years, discounted at 5%.
• Company Y already held a 15% stake in Company Z, previously recorded at $1.5m but now re-measured at $2m.
• Transaction costs: $200,000.
• Fair value of net assets acquired: $11m.

Solution:

1. Fair Value of Previous Interest:
   Gain = $2m (fair value) - $1.5m (carrying value) = $0.5m gain in profit or loss.

2. Contingent Consideration:
   Fair value = $2m / (1.05²) = $1.814m.

3. Purchase Consideration:
   Total = $8m + $1.814m = $9.814m.

4. Bargain Purchase:
   Gain = $11m (net assets) - $9.814m = $1.186m gain in profit or loss.

5. Transaction Costs:
   $200,000 expensed immediately in profit or loss.

6. Recognition:

   • Purchase consideration: $9.814m.
   • Gain on previous stake: $0.5m.
   • Bargain purchase gain: $1.186m.
   • Transaction costs: $200,000 expensed.

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