Business combination ASPE 1582 IFRS 3

Question 1

What is the definition of a business combination?

Answer 1

ASPE 1582 and IFRS 3
Business Combinations refer to any event where one
entity obtains control over another entity.

Business combinations generally happen in two
ways:
* purchase of assets of another entity
* purchase of shares of another entity

Question 2

How is goodwill calculated?

Answer 2

ASPE 1582 and IFRS 3
* Goodwill = [Consideration paid + NCI] – FV of 100% of identifiable assets and liabilities

• NCI can be measured at FV i.e., [purchase price/acquirer % ownership] * NCI % or NCI % share of FV or identifiable assets and liabilities
• In calculating the FV of identifiable assets acquired, an intangible asset should be recognized separately from goodwill when:

‒ They result from contractual or other legal rights e.g. operating lease with favorable terms, rights, patents, etc.

‒ They are capable of being separated and sold, licensed, etc.

Question 3

How is a bargain purchase (previously called
negative goodwill) treated?

Answer 3

ASPE 1582 and IFRS 3

• First reassess whether acquirer has correctly identified/measured FV all of the assets/liabilities and consideration, which could lead to the elimination of
  goodwill
• If the excess (i.e., negative goodwill) still exists following the reassessment, the acquirer would recognize the resulting gain in net income on the acquisition date

Question 4

How is contingent consideration treated?

Answer 4

ASPE 1582
* Recorded at fair value and considered part of the
consideration transferred

• If it will be paid in cash it would be classified as a liability and if new shares will be issued to pay the contingent consideration, it would be treated as equity
• Contingent consideration is not re-measured to its fair value at each subsequent reporting period

IFRS 3
* Same, except contingent consideration is re-measured to its fair value at each subsequent reporting period