CHAPTER FIVE

CONSOLIDATION OF FINANCIAL STATEMENTS

(ON THE DATE OF AQUISITION)
5.1. Introduction
In a business combination effected by purchase of net assets (statutory merger), the selling
company (combine) continues as a division of the purchasing company (combiner). Indicating that
the selling company is not a legal entity but still it is an economic (accounting) entity. In other
words, the selling company and purchasing company are considered as a single legal and economic
(accounting) entity. Thus, for external reporting purposes, the purchasing company (combiner)
prepares single financial statements called consolidated financial statement by combining the
financial statements of the selling company and purchasing company on the date of acquisition
and in subsequent to the date of acquisition.
In a business combination effected by purchase of shares (acquisition of common stock), the
selling company becomes a subsidiary (affiliate) of the purchasing (parent) company. In other
words, legal point of view, the parent and its subsidiary are considered as separate entity. Thus,
The Parent Co. prepares Parent Financial Statements while the Subsidiary prepares Subsidiary
Financial Statements. However, from the economic (accounting) point of view, the parent and its
subsidiary are considered as a single legal and economic (accounting) entity. As a result,
Consolidated Financial Statements is prepared by the Parent Co. by combining separate financial
statements of the parent and the subsidiary as the parent company is the reporting entity. Thus, this
chapter presents the preparation of consolidated financial statement (statement financial position)
on the date of acquisition. Accordingly, the chapter presents consolidation of wholly-owned
subsidiary and consolidation of partially owned (non-wholly-owned) subsidiary on the date of
acquisition.

5.2. The Parent and Subsidiary Relationship

➢ If the Parent Company owns more than (>50%) voting stock of another company, the acquired
company becomes an Affiliate (subsidiary).
➢ The combiner’s acquisition of common stock of a combinee corporation resorts to investor-
investee (parent-subsidiary) relationship.
➢ If the investor acquires a controlling interest (more than half of the outstanding voting common
stock), a parent-subsidiary relationship is established. The investee becomes a subsidiary of
the acquiring parent company (investor) but remains a separate legal entity.
➢ Strict adherence to the legal aspect would require issuance of separate financial statements for
the parent company and the subsidiary on the date of combination and for all subsequent
periods.
➢ But strict adherence to the legal form disregards the substance of most parent-subsidiary
relationship.
➢ A parent company and its subsidiary are a single economic entity.

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 ➢ Hence, consolidated financial statement are issued to report the financial position and operating
results of a parent company and its subsidiaries as though they comprised a single accounting
entity.
5.3. Consolidation Procedures under the Acquisition Method
Before plunging into the greater complexities of consolidation in the following chapter, we will
more carefully illustrate the general procedure for consolidating subsidiaries that were acquired
through a business combination.
The reporting objective of consolidating is substance over form. Although the parent and its
subsidiaries are separate legal entities and prepare separate, individual financial statements, the
overall economic entity is the group of companies. Indeed, consolidated statements are called
group accounts in most parts of the world, even though there are no formal “accounts”
for the group, just consolidation working papers and financial statements.
In theory, acquisition-method accounting combines the carrying values of the parent with the fair
values (at date of acquisition) of the purchased subsidiaries. In practice, consolidation actually
begins with carrying values of both companies. At the date of acquisition, it is clear that the
Table 5.1. MEAR Steps to Consolidation
Consolidation Steps On the date of acquisition Subsequent to the date of acquisition.

First Year Following Following Years

Acquisition
1. Measure ➢ Calculate cost and fair value adjustments (FVA)
➢ Allocate FVA
2. Eliminate ➢ Eliminate parent’s investment account and subsidiary’s share equity
accounts
❖ Eliminate intercompany transactions
and balances
❖ Eliminate unrealized profits
3. Amortize ❖ Amortize FVAs
4. Recognize ❖ Recognize impairments
▪ Recognize
cumulative
Impairments
carrying values and the fair values relate to the same assets and liabilities. As time moves on,
however, assets will enter and leave the SFP of the purchased subsidiary, and the asset base will
change. Therefore, broadly speaking, consolidation takes the carrying values of both companies
and adds the fair value adjustment (FVA) relating to each asset. A fair value adjustment, which
can be either a fair value increment or a fair value decrement, is the difference between the carrying
values and fair values of the acquiree’s identifiable assets and liabilities at the date of acquisition,
plus any goodwill. Specifically, the FVA is first allocated to the various identifiable assets and

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liabilities of the acquiree to the full extent of their fair value increments (or decrements). Any
excess of the FVA after the allocation process is allocated to goodwill.
In this and the following chapter, we follow a sequence of steps that we call the MEAR steps to
consolidation. MEAR is a mnemonic (a memory aid) that stands for the four steps required in a
typical consolidation: Measure, Eliminate, Amortize FVAs, and Recognize non-controlling
interest’s share of earnings. The general consolidation procedures under the acquisition method
are summarized in table 5.1.
5.4. Consolidation of Wholly-Owned Subsidiary On the date of acquisition
➢ Statement of Financial Position (SFP) is the only financial statement to be consolidated
on the date of acquisition.
➢ A Wholly - owned Subsidiary is a Subsidiary all of its outstanding shares are acquired by
the parent.
MEAR are needed at the beginning when you are becoming comfortable with the consolidation
process. We will develop the full sequence of steps (and sub-steps) in the following chapter.
However, since this chapter focuses only on consolidation at the date of acquisition, we need be
concerned here with only the first two steps, Measure and Eliminate. These steps are always
required at the date of acquisition, as well as for all subsequent reporting dates. Table 5.2. presents
the steps required under Measure and Eliminate on the date of acquisition.

Table 5.2. MEAR Steps to Consolidation of wholly-owned subsidiary on date of acquisition

1. Measure ➢ Calculate cost and fair value adjustments (FVA)
➢ Allocate FVA
2. Eliminate ➢ Eliminate parent’s investment account and subsidiary’s share
equity accounts
Illustration 5.1: Consolidation of Wholly Owned subsidiary on the date of acquisition
To illustrate the Consolidation of Wholly Owned subsidiary on the date of acquisition, assume that
on December 31, 20X5, Purchase Ltd. acquires all of the outstanding shares of Target Ltd. by
issuing 40,000 Purchase Ltd. shares with a market value of $30, or $1,200,000 total, in exchange.
The pre-transaction statements of financial position of both companies are shown below.

Table 5.3. Pre-Combination Statements of Financial Position

December 31, 20X5
Purchase Ltd. Target Ltd.
Cash $1,000,000 $ 50,000
Accounts receivable 2,000,000 150,000
Inventory 200,000 50,000
Land 1,000,000 300,000
Buildings and equipment 3,000,000 500,000
Accumulated depreciation ( 1,200,000 ) ( 150,000 )

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Total assets $6,000,000 $900,000
Accounts payable $1,000,000 $100,000
Long-term notes payable 400,000 —
Common shares* 2,600,000 200,000
Retained earnings 2,000,000 600,000
Total liabilities and shareholders’ equity $6,000,000 $900,000
*for Purchase Ltd.—160,000 shares outstanding
The estimated fair values of Target Ltd.’s assets and liabilities are as follows:
Fair values of Target Ltd.’s net assets:
Cash $50,000
Accounts receivable 150,000
Inventory 50,000
Land 400,000
Buildings and equipment 550,000
Accounts payable (100,000)
Fair Value of Target Ltd.’s net assets $1,100,000
Required
1. Record the business combination
2. Prepare consolidated SFP on the date of acquisition (December 31, 20X5)

Solution
1. Record the business combination
Purchase Ltd. recorded the combination as a purchase on December 31, 20x5 with the following
journal entries.

(c)To record Issuance of 40,000 common shares to stockholders of Target Ltd.

Investment in Target Ltd. Common shares (40,000*$30) 1,200,000
Common shares 1,200,000

The post-acquisition SFP of Purchase Ltd. and Target Ltd., and the fair values of Target Ltd.’s
assets and liabilities, are shown below.
Table 5.4. Post-Combination Statements of Financial Position
December 31, 20X5
Purchase Ltd. Target Ltd. FV of Target Ltd.
Cash $1,000,000 $50,000 $50,000
Accounts receivable 2,000,000 150,000 150,000
Inventory 200,000 50,000 50,000
Land 1,000,000 300,000 400,000
Buildings and equipment 3,000,000 500,000 550,000
Accumulated depreciation (1,200,000 ) (150,000 )
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Investment in Target Ltd. 1,200,000 —
Total assets $7,200,000 $900,000
Accounts payable $1,000,000 $100,000 ($100,000)
Long-term notes payable 400,000 —
Common shares* 3,800,000 200,000
Retained earnings 2,000,000 600,000
Total liabilities and shareholders’ equity $7,200,000 $900,000 ____________
Net fair value of Target Ltd. assets
and liabilities $1,100,000

2. Preparation of consolidated SFP on the date of acquisition (December 31, 20X5)

The Consolidation of SFP on the date of acquisition is made using the MEAR Steps as follows:
Step 1: Measure cost of acquisition and FVA and allocation of FVA
An analysis of the purchase price for Target Ltd. is illustrated in table 5.5. Of the $1,200,000
purchase price, $800,000 is attributed to the carrying value of the net assets acquired, and the
difference of $400,000 represents the FVA. The FVA of $400,000 is allocated to the various
identifiable assets of Target Ltd. to the extent of the total of their fair value increment of $300,000,
the residual of $100,000 being allocated to goodwill.

Table 5.5: Allocation of Fair Value Adjustment

100% Purchase of Target Ltd., December 31, 20X5
Purchase price $1,200,000
Less carrying value of Target’s net identifiable assets (100%) (800,000)
= Fair value adjustment, allocated below 400,000
Carrying Fair FVA
value (a) value (b) (b) – (a)
Cash $50,000 $50,000 —
Accounts receivable 150,000 150,000 —
Inventory 50,000 50,000 —
Land 300,000 400,000 $100,000
Buildings and equipment 500,000 550,000 50,000
Accumulated depreciation (150,000) — 150,000
Accounts payable (100,000) (100,000) —__
Total fair value adjustment (300,000)
Net asset carrying value $800,000
Fair value of assets acquired $1,100,000
Balance of FVA allocated
to goodwill $100,000

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Allocation of FVA to identifiable assets and liabilities assumed
The allocation of the FVA to the various assets and liabilities acquired is carried out following the
Measure step of the MEAR steps to consolidation. The Allocation of FVA to identifiable assets is
recorded using the following journal entry.
(a)To record allocation of FVA
Land 100,000
Buildings and equipment 50,000
Accumulated depreciation 150,000
Goodwill 100,000
Investment in Target Ltd. Common shares 400,000

Step 2: Eliminate parent’s investment account and subsidiary’s share equity accounts
The parent’s investment account and subsidiary’s share equity accounts are eliminated using the
following journal entry.

(e)To record elimination of reciprocal accounts

Common shares 200,000
Retained Earnings 600,000
Investment in Target Ltd. Common shares 800,000

Preparation of consolidated SFP on the date of acquisition

Table 5.6. Presents the derivation of Purchase Ltd.’s consolidated SFP at December 31, 20X5,
using the direct method. For each item on the SFP, we take the carrying value for Purchase Ltd.,
add the carrying value of Target Ltd., and add the fair value adjustment. There is one aspect of
table 5.4., that merits explanation. You’ll notice that accumulated depreciation is calculated by
adding the two companies’ amounts together, and then subtracting Target Ltd.’s accumulated
depreciation at the date of acquisition. We subtract Target Ltd.’s accumulated depreciation
because we want to show the fair value of Target Ltd.’s depreciable assets at the date of acquisition.
This amount is included in the capital asset account itself. If we carried Target’s accumulated
depreciation forward, we would be reducing the fair value. In effect, we would be combining fair
value in the asset account with written-off cost in the accumulated depreciation. Although we have
indicated which adjustments on table are for fair value adjustments and which are eliminations,
bear in mind that these purchase adjustments and eliminations are not independent. Essentially, all
of the adjustments are allocations of the $1,200,000 fair value. In future years, all of the
components of this fair value adjustment must be made simultaneously, as we will illustrate in the
following chapter.

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Table 5.6. Consolidation at Date of Acquisition, Wholly Owned Subsidiary

Consolidated Statement of Financial Position

December 31, 20X5

ASSETS
Current assets:
Cash [1,000,000 + 50,000]
$1,050,000
Accounts receivable [2,000,000 + 150,000] 2,150,000
Inventory [200,000 + 50,000] 250,000
$3,450,000
Property, plant, and equipment:
Land [1,000,000 + 300,000 + 100,000a] 1,400,000
Buildings and equipment [3,000,000 + 500,000 + 50,000a] 3,550,000
Accumulated depreciation [1,200,000 + 150,000 – 150,000a] (1,200,000)
$3,750,000
Other Assets:
Investment in Target Ltd. [1,200,000– 400,000a – 800,000e] _0_
Goodwill [+ 100,000a] 100,000
TOTAL ASSETS $7,300,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:

Current: accounts payable [1,000,000 + 100,000] $1,100,000

Long-term: notes payable [400,000 + 0] 400,000

1,500,000
Shareholders’ equity:
Common shares [3,800,000 + 200,000 – 200,000e] 3,800,000
Retained earnings [2,000,000 + 600,000 – 600,000e] 2,000,000
5,800,000
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $7,300,000
a = the fair value adjustment (and goodwill)
e = elimination of parent’s investment account and NCI’s shareholders’ equity accounts

5.4. Consolidation of Partially-Owned Subsidiary On the date of acquisition

➢ A partially - owned Subsidiary is a Subsidiary in which the majority, but not all (>50%
to 100%, exclusively) of its outstanding shares are acquired by the parent.

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 ➢ All important financial statements (Statement of Comprehensive Income (SCI),
Statement of Retained Earnings (SRE) and Statement of Financial Position (SFP) )
should be consolidated subsequent to the date of acquisition.
➢ Consolidation of a parent company and its partially owned subsidiary differs from the
consolidation of a wholly owned subsidiary in one major respect. i.e., the recognition of
minority interest (non-controllinginterest).
➢ Minority interest or no controlling interest is a term applied to the claims of stockholders
other than the parent company (controlling interest) to the net income or losses and net
assets of the subsidiary.
➢ The minority interest in the subsidiary’s net income or losses is reported in the Statement
of Comprehensive Income (SCI).
➢ The minority interest in the subsidiary’s net assets is reported in the Statement of Financial
Position (SFP).
Methods for consolidating partially- owned subsidiary
There are four alternative methods for consolidating partially- owned subsidiaries.
1. Proportionate consolidation method: Include only the parent’s share of the fair value of
the subsidiary’s assets, liabilities, revenues, and expenses (i.e., exclude the NCI entirely).
The consolidated SCI would include only the parent’s share of the subsidiary’s revenues
and expenses.
2. Parent-company method: Include the parent’s share of the fair values of the subsidiary’s
assets and liabilities, plus the carrying value (i.e., book value) of the NCI’s share. The
consolidated SCI would include 100% of the subsidiary’s revenues and expenses.
3. Parent-company extension or purchased goodwill method: Include 100% of the fair
value of the subsidiary’s net identifiable assets and liabilities, but only the parent’s share
of goodwill, and 100% of all revenues and expenses. Thus, under this method only the
goodwill on the portion paid by the parent in excess of the proportionate net fair value
acquired is included. On the SFP, the non-controlling interest is valued at its proportionate
share of the fair value of the net identifiable assets of the subsidiary.
4. Entity or full goodwill method: Include 100% of the fair value of the subsidiary’s assets
and liabilities and goodwill, and 100% of all revenues and expenses. This method includes
the entire implicit goodwill for the enterprise as a whole, including the NCI’s share. On the
SFP, the NCI is valued at its proportionate share of the full fair value of the subsidiary.
Note that the four alternatives summarized above differ only on the issue of whether, and to
what extent, the NCI’s share of the subsidiary should be included in the consolidated
statements.

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Required Methods under IFRS
In principle, the IASB believes that the only correct method of measuring NCI is the fourth method
above—that is, the entity, or full goodwill method. The board also believes that allowing
alternative methods of measurement reduces comparability. Nevertheless, because not enough
members of the IASB supported method 4 above, IFRS 3, Business Combinations, allows the use
of either method 3 or method 4 above on a transaction-by transaction basis. That is, each business
combination can be viewed as a separate transaction that can be accounted for by either method.
Consistency is not required.

Steps for consolidating partially- owned subsidiary

The MEAR steps required for consolidation of partially- owned subsidiary on the date of
acquisition, are presented in Table 5.7.
Illustration 5.2: Consolidation of Partially-Owned subsidiary on the date of acquisition
To illustrate consolidation of a non-wholly owned subsidiary at the date of acquisition, we will
use the same basic facts as we used in Illustration 5.1., except that Purchase Ltd. Buys 70% of
the outstanding shares of Target Ltd. on December 31, 20X5, giving 28,000 Purchase Ltd. Shares
Table 5.7. MEAR Steps to Consolidation of wholly-owned subsidiary on date of acquisition
3. Measure ➢ Calculate cost and fair value adjustments (FVA)
➢ Allocate FVA
➢ Determine NCI balance
4. Eliminate ➢ Eliminate parent’s investment account and subsidiary’s share
equity accounts
with the market value of $30 per share, in exchange.
Required
1. Record the business combination
2. Prepare consolidated SFP on the date of acquisition (December 31, 20X5) under the full
goodwill (entity) method.
Solution
1. Record the business combination
Purchase Ltd. recorded the combination as a purchase on December 31, 20x5 with the following
journal entries.

(c)To record Issuance of 28,000 common shares to stockholders of Target Ltd.

Investment in Target Ltd. Common shares (28,000*$30) 840,000
Common shares 840,000

The post-acquisition SFP of Purchase Ltd. and Target Ltd., and the fair values of Target Ltd.’s
assets and liabilities, are shown below.

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Table5.8: Post-Combination Statements of Financial Position
December 31, 20X5
Purchase Ltd. Target Ltd. FV of Target Ltd.
Cash $1,000,000 $50,000 $50,000
Accounts receivable 2,000,000 150,000 150,000
Inventory 200,000 50,000 50,000
Land 1,000,000 300,000 400,000
Buildings and equipment 3,000,000 500,000 550,000
Accumulated depreciation (1,200,000 ) (150,000 )
Investment in Target Ltd. 840,000 —
Total assets $7,200,000 $900,000
Accounts payable $1,000,000 $100,000 ($100,000)
Long-term notes payable 400,000 —
Common shares* 3,440,000 200,000
Retained earnings 2,000,000 600,000
Total liabilities and shareholders’ equity $7,200,000 $900,000 ____________
Net fair value of Target Ltd. assets
and liabilities $1,100,000

2. Preparation of consolidated SFP on the date of acquisition (December 31, 20X5)

The Consolidation of SFP on the date of acquisition is made using the MEAR Steps as follows:
Step 1: Measure cost of acquisition and FVA, allocation of FVA and determination of NCI
We will use the MEAR steps for consolidation, now modified for consolidating a non-wholly
owned subsidiary. The updated MEAR steps are presented in table 5.7. Since we are now
consolidating at the time of acquisition, we need to carry out only those adjustments and
eliminations. Table 5.9. presents the first step of Measure, which requires us to calculate the
purchase price, the 100% fair value, and FVA and allocating the FVA to the various identifiable
assets and liabilities, while allocating the balance to goodwill.

Table 5.9: Allocation of Fair Value Adjustment

100% Purchase of Target Ltd., December 31, 20X5
Purchase price $1,200,000
Less carrying value of Target’s net identifiable assets (100%) (800,000)
= Fair value adjustment, allocated below 400,000
Carrying Fair FVA
value (a) value (b) (b) – (a)
Cash $50,000 $50,000 —
Accounts receivable 150,000 150,000 —
Inventory 50,000 50,000 —

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Land 300,000 400,000 $100,000
Buildings and equipment 500,000 550,000 50,000
Accumulated depreciation (150,000) — 150,000
Accounts payable (100,000) (100,000) —__
Total fair value adjustment (300,000)
Net asset carrying value $800,000
Fair value of assets acquired $1,100,000
Balance of FVA allocated
to goodwill @ 100% $100,000

To reiterate, under the entity method, the goodwill of $100,000 represents the sum of Purchase
Ltd.’s share of $70,000 and the NCI’s share of $30,000. You will notice that in table 5.9. we
calculate 100% of the fair value of Target Ltd. based on the purchase price of $840,000 paid by
Purchase Ltd. for its 70% share. This is a very quick and uncomplicated method of calculating the
full fair value of the acquisition. However, this calculation won’t yield the correct result if the
buyer pays less than its proportionate fair value of the target company’s net assets, which is known
as a bargain purchase. We will illustrate the correct method for a bargain purchase in a separate
section toward the end of this chapter. Under the entity method, the NCI is measured at its share
of 100% of the fair value of Target Ltd., including the full value of goodwill—that is, 30% of
$1,200,000, or $360,000. Included in the $360,000 is the NCI’s share of goodwill, which is 30%
of $100,000, or $30,000.
Allocation of FVA and determination of NCI & Good will
Under the entity method we need to include the full fair value of Target Ltd.’s assets and liabilities
in the Purchase Ltd. consolidated SFP, rather than just the fair value adjustments that relate to
Purchase Ltd.’s 70% share. Therefore, to balance the SFP, we need to allocate to the NCI its 30%
share of the carrying value (i.e., $800,000 × 30% = $240,000) and fair value adjustment ($400,000
× 30% = $120,000, including goodwill) of Target Ltd.’s net assets. The total goodwill of $100,000
relating to the acquisition of Target Ltd. is made up of the $70,000 paid by Purchase Ltd. for its
70% share and $30,000, the NCI’s share allocated to it. Therefore, the non-controlling interest is
$360,000, calculated as (30% × $1,100,000) + (30% × $100,000).
The allocation of the FVA to the various assets and liabilities acquired is carried out following the
Measure step of the MEAR steps to consolidation. The Allocation of FVA to identifiable assets is
recorded using the following journal entry.

(a)To record allocation of FVA

Land 100,000
Buildings and equipment 50,000
Accumulated depreciation 150,000
Goodwill 100,000
Non- controlling interest (400,000*30%) 120,000
Investment in Target Ltd. Common shares 280,000

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Step 2: Eliminate parent’s investment account and subsidiary’s share equity accounts
The parent’s investment account and subsidiary’s share equity accounts are eliminated using the
following journal entry.

(e)To record elimination of reciprocal accounts

Common shares 200,000
Retained Earnings 600,000
Non- controlling interest (800,000*30%) 240,000
Investment in Target Ltd. Common shares 560,000

Preparation of consolidated SFP on the date of acquisition

Table 5.10. Presents the derivation of Purchase Ltd.’s consolidated SFP at December 31, 20X5,
using the direct method. For each item on the SFP, we take the carrying value for Purchase Ltd.,
add the carrying value of Target Ltd., and add the fair value adjustment.
The fair value adjustment, goodwill and non – controlling interest is indicated
with a superscript letter (a). Also, as required under the Eliminate step applicable to
consolidation
at the time of acquisition, we must eliminate Purchase Ltd.’s investment account and
Target’s shareholders’ equity accounts, indicated with a superscript letter (e).
Table 5.10. Consolidation at Date of Acquisition, Non-Wholly Owned Subsidiary
Consolidated Statement of Financial Position
December 31, 20X5

ASSETS
Current assets:
Cash [1,000,000 + 50,000]
$1,050,000
Accounts receivable [2,000,000 + 150,000] 2,150,000
Inventory [200,000 + 50,000] 250,000
$3,450,000
Property, plant, and equipment:
Land [1,000,000 + 300,000 + 100,000a] 1,400,000
Buildings and equipment [3,000,000 + 500,000 + 50,000a] 3,550,000
Accumulated depreciation [1,200,000 + 150,000 – 150,000a] (1,200,000)
$3,750,000
Other Assets:
Investment in Target Ltd. [840,000– 280,000a – 560,000e] _0_
Goodwill [+ 100,000a] 100,000
TOTAL ASSETS $7,300,000

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 LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:

Current: accounts payable [1,000,000 + 100,000] $1,100,000

Long-term: notes payable [400,000 + 0] 400,000

1,500,000
Shareholders’ equity:
Common shares [2,600,000 +840,000 bc + 200,000 – 200,000e] 3,440,000
Retained earnings [2,000,000 + 600,000 – 600,000e] 2,000,000

Non- controlling interest [120,000a + 240,000e] 360,000

5,800,000
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $7,300,000
a = the fair value adjustment (and goodwill)
e = elimination of parent’s investment account and NCI’s shareholders’ equity accounts

5.5. DISCLOSURE
Business combinations are significant events. They often change the nature of operations of a
company and thus change the components of the earnings stream. All users’ financial reporting
objectives are affected by substantial business combinations. At a minimum, the asset and liability
structure of the reporting enterprise is changed. Disclosure of business combinations therefore is
quite important. IFRS 3 requires a long list of disclosures for business combinations completed
during a reporting period. The acquirer is required to disclose information that enables
users to evaluate:
➢ the nature and financial effect of business combinations that occurred either during the
reporting period or after the end of the reporting period but before the date on which the
financial statements for that period are authorized for issue; and
➢ the financial effects of the adjustments made in the current reporting period relating to a
business combination that occurred either in that reporting period or in previous reporting
periods.
We will not reproduce the complete list of disclosures here; the more essential aspects
include:
➢ a description, including the name of the acquired subsidiary, the date of acquisition,
percentage of the voting shares acquired, primary reason for the business combination, and
how control was obtained;
➢ a qualitative description of the factors giving rise to the goodwill and intangible assets not
separately identifiable from goodwill;
➢ the amount of any contingent consideration recognized, and the arrangement and basis for
arriving at such amount;
➢ amounts of the major classes of assets and liabilities acquired;
➢ fair value on the acquisition date of the purchase consideration transferred and of each major
class of consideration;

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 ➢ the amount and reason for a gain from bargain purchase if present; and
➢ the amount and measurement basis of the non-controlling interest if less than 100% of the
acquiree is acquired.

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