Question

Pepper Company acquired all of Salt Corporation’s outstanding shares on December

    31, 2017 for $750,000 cash.  Pepper will operate Salt as a wholly owned

    subsidiary with a separate legal and accounting identity.  Although many of Salt’s

    book values approximate fair values, several of its accounts have a fair values that

    differ from book values.  In addition, Salt has internally developed assets that remain

    unrecorded on its books.  In deriving the acquisition price, Pepper assessed Salt’s

    fair and book value differences as follows:

Account	Book Values	Fair Values
Patented Technology	$155,000	$237,000
Customer List	$0	$180,000
In-process R&D	$0	$200,000
Machinery	$105,000	$95,000
Notes Payable	($50,000)	($52,000)

Required:  Complete the consolidation worksheet for Pepper and Salt at December 31, 2017.

Answer 1

Acquisition method

The acquisition method (called the 'purchase method' in the 2004 version of IFRS 3) is used for all business combinations. [IFRS 3.4]

Steps in applying the acquisition method are: [IFRS 3.5]

1).Identification of the 'acquirer

' 2). Determination of the 'acquisition date'

3).Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI, formerly called minority interest) in the acquiree

4).Recognition and measurement of goodwill or a gain from a bargain purchase.

1).Identifying an acquirer

The guidance in IFRS 10 Consolidated Financial Statements is used to identify an acquirer in a business combination, i.e. the entity that obtains 'control' of the acquiree. [IFRS 3.7]

In our case is the Pepper Company.

2).Acquisition date

An acquirer considers all pertinent facts and circumstances when determining the acquisition date, i.e. the date on which it obtains control of the acquiree. The acquisition date may be a date that is earlier or later than the closing date. [IFRS 3.8-9]

In the case is the December 31, 2007

3).Acquired assets and liabilities

IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising in a business combination:

Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree, are recognised separately from goodwill [IFRS 3.10] Measurement principle. All assets acquired and liabilities assumed in a business combination are measured at acquisition-date fair value. [IFRS 3.18]

Pepper Company Acquired following assets and liabilities in Salt corporation measured at Fair Value on the date of acquisition.

Patent Technology = $237000

Customer List = $180000

Research and development in process = $ 200000

Machinery = $95000

Notes Payable = ($52000)

Net value Assets Received = $660000

Goodwill = Consideration transferred + Amount of non-controlling interests + Fair value of previous equity interests - Net assets recognised

Goodwill = $750000+0+0-$660000

Goodwill = $90000

4). Choice in the measurement of non-controlling interests (NCI)

IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis, to measure non-controlling interests (NCI) either at: [IFRS 3.19]

fair value (sometimes called the full goodwill method), or the NCI's proportionate share of net assets of the acquiree.