Question

1. At the date Giant bought Minor, Minor had an asset on its books for goodwill. True/False: When Giant allocates the consideration for the deal to Minor’s assets and liabilities, Giant will allocate zero to this preexisting goodwill.
2. True/False: The accounting for business combinations under IFRS and GAAP is very similar, because the FASB and IASB worked jointly on a project to develop standards in this area.
3. True/False: Under GAAP, it is possible for a company to record BOTH goodwill and a gain on bargain purchases on the same transaction.

Answer 1

Answer:

Given: Giant bought Minor. Minor had an asset on its books for goodwill.

Case 1: When Giant allocates the consideration for the deal to Minor’s assets and liabilities, Giant will allocate zero to this preexisting goodwill.

Answer: True.

Comments: In business combinations, goodwill acquired after adjustments will add to the gain and not to the existing goodwill. Existing goodwill is an earned asset of Giant Company. This will remain unchanged even if it purchases goodwill of other companies. [IFRS 3.34-35], [IFRS 3.36]

Case 2: The accounting for business combinations under IFRS and GAAP is very similar, because the FASB and IASB worked jointly on a project to develop standards in this area.

Answer: True

Comments: FASB and IASB have an MoU to converge standards regarding Business Combinations. MoU was signed in 2005.

Case 3: Under GAAP, it is possible for a company to record BOTH goodwill and a gain on bargain purchases on the same transaction.

Answer: False.

Comments: On a single transaction, it can be either a goodwill acquired or a gain. Both is not possible on a single transaction. [IFRS 3] (Revised).

Comment below if more explanation is needed.

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