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Front 1

Which of the following measurement basis are allowed by FRS102?

Back 1

Historic cost and fair value

Front 2

Which of the following measurement basis are not allowed by FRS102?

Back 2

Current cost and present value

Front 3

Where does FRS102 allow accounting policy choices where IFRS does not?

Back 3

Accounting policy choices are allowed for both borrowing cost and development costs. UnderFRS102 they can either be capitalised or expensed.

Front 4

Explain the accounting treatment of goodwill under IFRS 3 Business Combinations and how it isdifferent under FRS102.

Back 4

Goodwill is capitalised as an intangible non-current asset under both IFRS and UK GAAP,however its initial measurement and subsequent treatment is different.

IFRS 3 allows the goodwill to be calculated using both the proportionate method and the fair valuemethod. The proportionate share method measures the parent’s goodwill only, whilst the fairvalue method results in a higher value as it includes the non-controlling interest goodwill also.

Negative goodwill is recognised immediately through profit or loss.

Goodwill is then subject to annual impairment reviews under IFRS.

FRS102 does not allow the fair value method for goodwill, whilst it is also amortised over its usefullife. If this cannot be estimated, then it should not exceed ten years. Negative goodwill isrecognised against positive goodwill on the statement of financial position, once its accuracy hasbeen validated through remeasurement and reassessment of the elements of the calculation (costand net assets).

Front 5

According to IFRS 10, an investor controls an investee when:

Back 5

•The investor has power over the investee, and

•The investor is exposed, or has rights, to variable returns from its involvement with the investee, and

•The investor has the ability to affect those returns through its power over the investee.

Front 6

IFRS 10 identifies a range of circumstances that may need to be considered when determining whether or not an investor has power over an investee, such as

Back 6

exercise of the majority of voting rights in an investee

•contractual arrangements between the investor and other parties

•holding less than 50% of the voting shares, with all other equity interests held by a numerically large, dispersed and unconnected group

•holding potential voting rights (such as convertible loans) that are currently capable of being exercised

•the nature of the investor's relationship with other parties that may enable that investor to exercise control over an investee.

Front 7

The acquisition method has the following requirement

Back 7

•Identifying the acquirer

•Determining the acquisition date

•Recognising and measuring the subsidiary's identifiable assets and liabilities

•Recognising goodwill (or a gain from a bargain purchase) and any non-controlling interest.

Front 8

Items that are not identifiable or do not meet the definitions of assets or liabilities are subsumed into the calculation of purchased goodwill.Watch out for the following items:

Contingent Liabilities:

Provison for future operating losses:

Intangible assets:

Goodwill:

Back 8

Contingent liabilities are recognised at fair value at the acquisition date. This is true even where an economic outflow is not probable. The fair value will incorporate the probability of an economic outflow.

•Provisions for future operating losses cannot be created as this is a post-acquisition item. Similarly, restructuring costs are only recognised to the extent that a liability actually exists at the date of acquisition.

•Intangible assets are recognised at fair value if they are separable or arise from legal or contractual rights. This might mean that the parent recognises an intangible asset in the consolidated financial statements that the subsidiary did not recognise in its individual financial statements, e.g. an internally generated brand name.

•Goodwill in the subsidiary's individual financial statements is not consolidated. This is because it is not separable and it does not arise from legal or contractual rights.

Front 9

Goodwill should be recognised on a business combination. This is calculated as the difference between

Back 9

(1) The aggregate of the fair value of the consideration transferred and the non-controlling interest in the acquiree at the acquisition date, and

(2)The fair value of the acquiree's identifiable net assets and liabilities

Front 10

When determining the fair value of the consideration transferred, remember that:

Back 10

(When calculating goodwill, purchase consideration transferred to acquire control of the subsidiary must be measured at fair value)

Contingent consideration is included even if payment is not deemed probable. Its fair value will incorporate the probability of payment occurring.

•Acquisition costs are excluded from the calculation of purchase consideration.

–Legal and professional fees are expensed to profit or loss as incurred

–Debt or equity issue costs are accounted for in accordance with IFRS 9 Financial Instruments

Front 11

IFRS 3 provides two choices in valuing the non-controlling interest at acquisition

Back 11

Method 1 –The proportionate share of net assets method

NCI % × Fair value of the net assets of the subsidiary at the acquisition date

Method 2 –The fair value method

Fair value of NCI at date of acquisition. This is usually given in the question

If the NCI is valued at acquisition as their proportionate share of the acquisition net assets, then only the acquirer's goodwill will be calculated.

If the NCI is valued at acquisition at fair value, then goodwill attributable to both the acquirer and the NCI will be calculated. This is known as the 'full goodwill method

NCI should be decided on a transaction by transaction basis

Front 12

Bargain purchase

If the share of net assets acquired exceeds the consideration given, then a gain on bargain purchase ('negative goodwill') arises on acquisition. The accounting treatment for this is as follows:

Back 12

•IFRS 3 says that negative goodwill is rare and therefore it may mean that an error has been made in determining the fair values of the consideration and the net assets acquired. The figures must be reviewed for errors.

• If no errors have been made, the negative goodwill is credited immediately to profit or loss

Front 13

Measurement period

Back 13

During the measurement period, IFRS 3 requires the acquirer in a business combination to retrospectively adjust the provisional amounts recognised at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date.

This would result in goodwill arising on acquisition being recalculated.

The measurement period ends no later than twelve months after the acquisition date

Front 14

Impairment of goodwill

Goodwill does not generate independent cash inflows. Therefore, it is tested for impairment as part of a cash generating unit.

'A cash generating unit is the 'smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets' (IAS 36, para 6)

For exam subsidiary is cash gen unit.

What is an impairment loss and what is the recoverable amount?

Back 14

An impairment loss is the amount by which the carrying amount of an asset or a cash generating unit exceeds its recoverable amount.

Recoverable amount is the higher of fair value less costs to sell and value in use.

Impairment losses on a subsidiary will firstly be allocated against goodwill and then against other assets on a pro-rata basis

Front 15

Accounting for an impairment with a non-controlling interest.

Full method of valuing NCI

Proportionate method of valuing NCI

Back 15

Full method of valuing NCI

Goodwill calculated under the fair value method represents full goodwill. It can therefore be added together with the other net assets of the subsidiary and compared to the recoverable amount of the subsidiary's net assets on a like for like basis.

Any impairment of goodwill is allocated between the group and the NCI based upon their respective shareholdings

Proportionate method of valuing NCI

If the NCI is valued at acquisition at its share of the subsidiary's net assets then only the goodwill attributable to the group is calculated. This means that the NCI share of goodwill is not reflected in the group accounts. As such, any comparison between the carrying amount of the subsidiary (including goodwill) and the recoverable amount of its net assets will not be on a like-for-like basis.

•In order to address this problem, goodwill must be grossed up to include goodwill attributable to the NCI prior to conducting the impairment review. This grossed up goodwill is known as total notional goodwill.

•As only the parent’s share of the goodwill is recognised in the group accounts, only the parent’s share of the goodwill impairment loss should be recognised.