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Business combinations, fair value measurement and goodwill - Coggle Diagram
Business combinations, fair value measurement and goodwill
When an acquirer obtains control of a business, IFRS 3 requires business combinations to be accounted for using the acquisition methd
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Goodwill
The price paid for a company at acquisition will normally exceed the fair market value of its net assets or equity, the difference is purchased goodwill
This represents the additional amount paid for factors such as the reputation of the business, experience of employees, customer base and the brand of the business
Goodwill can be negative when the aggregate of the fair values of the separable net assets acquired may exceed what the parent company paid for them
For negative goodwill, an entity should reassess by measuring both the cost of the combination and the acquires identifiable net assets to identify any error, any excess remaining after such reassessment should be recognised in the P&L and OCI
Impairment of goodwill
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IAS 36 requires an impairment review for all assets where there is an indication of impairment, goodwill is tested for impairment annually even if there is no impairment indicator
To test for impairment, IAS 36 requires goodwill to be allocated to a cash generating unit or a group of CGUs
A CGU is the smallest identifiable group of assets that benefits from the business combination and generates cash inflows independently from other assets
The asset is impaired when an asset's carrying value exceeds its recoverable amount (the higher of fair value less costs of disposal and value in use)
Some triggering events that may cause the fair market value of a goodwill asset to drop below its carrying amount
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Fair value measurmenet
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
Consolidated financial statements are prepared from the perspective of the group and must reflect their cost to the group not the original cost to the subsidiary
Purchase consideration
To ensure an accurate figure is calculated for goodwill, the consideration for a subsidiary must also be measured at fair value, not all consideration is for cash or due immediately on acquisition. Any non-cash elements must be valued at fair value
Cash
Direct costs of the acquisition such as legal ad other consultancy fees are expenses and not treated as part of the purchase consideration
Deferred consideration
The amount payabale at a future date by an acquirer to the acquire in a business combination after a pre-defined time period, often linked to post acquisition performance targets.
The present value of the amount payable is recorded as the part of the consideration at the date of acqusiiton
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Contingent consideration
An uncertain amount that is payable at a future date by an acquirer to the acquirer in such a business combination which is linked to a specified future event or condition met within pre-defined time period such as financial performance
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