Question 1

If shares are issued as part of the consideration paid, transactions costs such as brokerage fees may be incurred. According to IFRS 3, the appropriate accounting treatment for such costs in the records of the acquirer is a debit to:

Accepted Answer

A

Question 2

Net employee benefit liabilities acquired in a business combination are measured by using the:

Accepted Answer

According to ASC 805-20-25-11, net employee benefit liabilities acquired in a business combination should be measured at their fair value, which is determined using the present value method. This method takes into account the expected future cash outflows and applies a discount rate to reflect the time value of money. Option B is incorrect because future cash outflows should be discounted to their present value. Option C is incorrect because the face value of the liabilities does not reflect their fair value. Option D is incorrect because the cash method is not appropriate for measuring a liability at fair value.

Question 3

Adjustments cannot be made subsequent to the initial accounting for:

Accepted Answer

B

Question 4

The consideration transferred in a business combination is measured as the fair value of the:

Accepted Answer

The consideration transferred in a business combination is measured as the fair value of the consideration given only, not including the net assets acquired or costs directly attributable to the combination.

Question 5

The following items are NOT deemed to be items that would meet the definition of an intangible asset given by IFRS 3:

Accepted Answer

An experienced marketing team is not considered an intangible asset under IFRS 3 because it does not meet the criteria of being identifiable and separable from the entity, nor does it arise from contractual or other legal rights.

Question 6

A business combination is defined as:

Accepted Answer

A business combination is a transaction or event in which an acquirer obtains control of one or more businesses. It is not necessarily limited to entities, as multiple businesses can be combined into one entity through a business combination. Choice A is incorrect because it limits the definition to an acquirer obtaining control of an acquiree, which may be too narrow. Choice B is incorrect because it limits the definition to one entity obtaining control of one or more other entities, which may not involve businesses.

Question 7

Where the acquirer purchases assets and assumes liabilities of another entity it does NOT need to consider measurement of:

Accepted Answer

In an acquisition where assets are purchased and liabilities are assumed, the focus is on the fair values of the identifiable net assets acquired, not their carrying amounts. The consideration transferred, the fair values of the identifiable net assets, and any resulting goodwill are key measurements in such transactions.

Question 8

Bolton Limited acquires the net assets of Pamelia Limited for a cash consideration of $100 000. One half is to be paid on acquisition date and one half is payable in one year's time. The appropriate discount rate is 10% p.a. The present value of the cash outflow in one year's time is:

Accepted Answer

The answer of Bolton Limited acquires the net assets of...

Question 9

Damon Limited acquired the net assets of Gina Limited. Damon Limited provided an item of equipment as part of the consideration. The fair value of the equipment was €13 000. It cost €20 000 and had a carrying amount of €12 000. Which of the following entries appropriately reflects the gain or loss on the equipment?

Accepted Answer

Since the equipment was given as part of the consideration for the acquisition, it was not sold. Therefore, options A and B do not apply. Option D implies that there was a loss on the transaction, which is not the case as the fair value of the equipment was greater than its carrying amount. The appropriate entry is to recognize a gain on the equipment, hence option C is correct. The gain on the equipment is calculated as follows: Fair value - Carrying amount = €13,000 - €12,000 = €1,000, which should be credited to the Gain on sale account.

Question 10

In a business combination, the acquirer is the party that:

Accepted Answer

The acquirer in a business combination is the party that obtains control over the other entities. The acquirer's financial statements will reflect the assets and liabilities of the acquired entity as well as any goodwill or other intangible assets recognized as a result of the combination.

Question 11

In a business combination, the acquiree is the party that:

Accepted Answer

The acquiree in a business combination is the party that gives up control over the net assets acquired, as they are being acquired by another entity.

Question 12

Oliveira Limited estimated that the net present value of future cash flows from Equipment acquired in a business combination is $15 000. The cost of replacing the Equipment is estimated to be $18 000. The Equipment has been independently appraised at a value of $14 000. A similar item of Equipment cost the acquirer $19 000 the previous year. The fair value at which the Equipment will be recognised when recording the business combination is:

Accepted Answer

The fair value recognized when recording the business combination should be based on the independently appraised value of the Equipment, which is $14 000. The estimated net present value of future cash flows and the cost of replacing the Equipment are not relevant in determining its fair value. The cost of acquiring a similar item of Equipment the previous year is also not indicative of the fair value at the time of the current business combination. Therefore, the correct answer is A) $14 000.

Question 13

Valdez Limited acquired a 25% interest in Alaska Pty Ltd on 1 January 2016. On 15 September 2016 it acquired an additional 10% interest, and on 15 March 2017 a further 40%. According to IFRS 3, a business combination occurs on:

Accepted Answer

A business combination occurs when an entity obtains control of one or more businesses. Control is the power to govern the financial and operating policies of an entity to obtain benefits from its activities. Valdez Limited did not obtain control of Alaska Pty Ltd until it acquired a 40% interest on 15 March 2017. Therefore, the business combination occurred on 15 March 2017 only.

Question 14

Fredericks Limited acquired the identifiable assets and liabilities of Nicole Limited for €134 000. The items acquired, stated at fair value, are: 
•	Plant €72 000
•	Inventory €40 000
•	Trade receivables €18 000
•	Patents €10 000
•	Trade payables €16 000.

The difference on acquisition is:

Accepted Answer

The total fair value of assets acquired is €140,000 (€72,000 + €40,000 + €18,000 + €10,000) and liabilities are €16,000. The net assets are €124,000 (€140,000 - €16,000). The purchase price is €134,000, so the goodwill is €10,000 (€134,000 - €124,000).

Question 15

IFRS 3 is relevant when accounting for a business combination that:

Accepted Answer

IFRS 3 is specifically designed to address accounting for business combinations where one entity acquires the net assets of another entity. It does not apply to joint ventures, mutual entities, or entities that are not investor-owned.

Question 16

Johnson Limited estimated the net present value of future cash flows from specialised Plant acquired under a business combination to be $30 000. A replacement cost for the Plant is estimated to be $33 000. The Plant has been independently appraised at a value of $31 000. A similar item of Plant cost the acquirer $29 000 the previous year. What is the fair value for recognition of the Plant under a business combination?

Accepted Answer

The fair value of the Plant, which is the amount that would be agreed upon in an arm's length transaction between knowledgeable, willing parties, should be based on the independent appraisal value of $31 000 as it is the most reliable and objective estimate. The estimated replacement cost and previous acquisition cost do not provide sufficient evidence to support a different fair value estimate. Therefore, the fair value for recognition of the Plant under a business combination is $31 000.

Question 17

In order for a tangible asset to be recognised by an acquirer under a business combination it must be probable that future economic benefits will flow to the acquirer and:

Accepted Answer

In order for a tangible asset to be recognised by an acquirer under a business combination, it must meet the criterion that its fair value can be measured reliably. While being a non-current asset is generally true for tangible assets, it is not a requirement for recognition. Similarly, while present value methods may be used to measure certain tangible assets (such as long-lived assets that generate cash flows over time), it is not a universal requirement. Lastly, there is no requirement that the asset be non-monetary (although there are specific recognition rules for intangible assets like goodwill).

Question 18

According to IFRS 3, a gain on bargain purchase arises when the acquirer's interest in the fair value of the acquiree's identifiable assets and liabilities is:

Accepted Answer

A gain on bargain purchase under IFRS 3 occurs when the acquirer's interest in the fair value of the acquiree's identifiable assets and liabilities exceeds the consideration transferred for the acquisition.

Question 19

The acquisition date for a business combination is the date on which:

Accepted Answer

The acquisition date for a business combination is the date on which the acquirer effectively obtains control of the acquiree. This typically occurs when the acquirer gains control of the majority of the voting rights or the power to direct the financial and operating policies of the acquiree. While a substantive agreement and public announcement may precede the acquisition date, they do not determine when control has been obtained.

Question 20

Appendix B of IFRS 3 requires disclosure of which of the following?
 I details of contingent consideration
II the date of exchange
III carrying amounts of assets and liabilities in business combinations where shares are acquired
IV a qualitative description of the factors that make up goodwill

Accepted Answer

Appendix B of IFRS 3 requires disclosure of details of contingent consideration, the date of exchange, and a qualitative description of the factors that make up goodwill.

Quiz 26: Share-Based Payment