On 1 January 20X0, Linda Ltd acquired 100 % of the share capital of Yoko Ltd for $900 000 cash.At that date, the equity section of Yoko Ltd's balance sheet was as follows:
$\begin{array}{llcc}
\text { } &\$ \
\text {Share capital } &900000\
\text {Retained profits } &400000\
\text {
Asset revaluation reserve } &300000\
\end{array}$
Assuming all assets and liabilities were recorded at their fair values what will be the effect of the acquisition on the financial statements?

Question

On 1 January 20X0, Linda Ltd acquired 100 % of the share capital of Yoko Ltd for $900 000 cash.At that date, the equity section of Yoko Ltd's balance sheet was as follows:
$\begin{array}{llcc}
  \text {  } &\$  \
 \text {Share capital  } &900000\
 \text {Retained profits  } &400000\
 \text {
Asset revaluation reserve  } &300000\
\end{array}$
Assuming all assets and liabilities were recorded at their fair values what will be the effect of the acquisition on the financial statements?

Quizplus · Accepted Answer

When a business combination is made, the acquirer needs to recognize the fair value of the identifiable assets, liabilities, and contingent liabilities acquired. The excess of the cost of the acquisition over the fair value of the identifiable net assets acquired is recognized as goodwill in the separate financial statements of the acquirer.

In this case, the cost of acquisition is $900,000 and the fair value of the identifiable net assets is $600,000 ($900,000 - $400,000 - $300,000). Therefore, there is a bargain purchase of $300,000 ($900,000 - $600,000).

According to IFRS 3, a bargain purchase is recognized in the income statement of the acquirer in the period of the acquisition, and it reduces the cost of the acquisition. However, a bargain purchase cannot be negative goodwill (i.e., the fair value of the identifiable net assets acquired is higher than the cost of acquisition). In this case, the bargain purchase is $300,000, which is not negative goodwill.

In the consolidated financial statements of the Linda Group, the goodwill recognized in Linda's separate financial statements is eliminated, and the bargain purchase is recognized as a gain in the consolidated income statement. Therefore, the bargain purchase will be increased by $700,000 ($300,000 in the Yoko's separate financial statements + $400,000 in goodwill elimination in the Linda Group consolidated financial statements).

On 1 January 20X0, Linda Ltd Acquired 100 % of the Share