Goodwill in accordance with IFRS 3

[hinanifaf]

Good Members,
Q
On 30Sept 2009, P LTD purchased 80% of the ordinary share capital of C ltd for 1.45mil.The book value of C LTD'S net assets at the date of acquisition was 1.35mil.A valuation exercise showed that the fair value of C LTD'S property,plant and equipment at that date was 100000 greater than book value and C ltd immediately incorportated this valuation into its own books.C LTD'S financial statements at 30 Sept 2009 contained notes referring to a contingent liability with a fair value of 200000.Poly ltd acquired C ltd with the intention of restructuring the latter's production facilities. The estimated cost of the restructuring plan totalled 115000.

What will be the goodwill in accordance with IFRS 3 Business Combination.
Thanks
Flora

[Muhammad Amir]

Although, the above mentioned question is simple but before we embark on calculation of goodwill there needs some clarification on the accounting treatment of contingent liability and recognition of cost of restructuring / reorganization under IFRS-3 . So, therefore I will start with contingent liability.

Paragraph 23 of IFRS-3 states that the requirements in IAS-37 do not apply in determining which contingent liabilities to recognize as of the acquisition date. Instead, the acquirer shall recognize as of the acquisition date a contingent liability assumed in a business combination if it is a present obligation that arises from past events and its fair value can be measured reliably. Therefore, contrary to IAS-37, the acquirer recognizes a contingent liability assumed in a business combination at the acquisition date even if it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.

Paragraph 56 of IFRS-3 deals with the subsequent measurement of contingent liability. It states that after initial recognition and until the liability is settled, cancelled or expired, the acquirer shall measure a contingent liability recognized in a business combination at the higher of
a) the amount that would be recognized in accordance with IAS-37; and
b)the amount initially recognized (i.e. at the time of acquisition)."



A restructuring provision can be recognized in a business combination only when the acquiree has, at the acquisition date, an existing liability for which there are detailed conditions in IAS-37, but these conditions are unlikely to exist at the acquisition date in most business combinations.


Goodwill (Proportionate method) -

Consideration transferred =================> $1.45 m

Fair value of Net Assets-

Book Value (incl. 100,000) <font color="red"><b>*</b></font id="red"> => $1.35 m
Contingent Liability==========> ($0.2m)
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Faie value of Net Assets =====> $ 1.15m @ 80% ===> (0.92)
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Goodwill =========================================>0.53
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<font color="red"><b>*</b></font id="red"> C ltd has already incorporated the fair valuation in its books of accounts, so, there is no need for further adjustment.