IFRS for SMEs) IFRS for SMEs Business Combinations and Goodwill 1 — Questions and Answers
Question 1: Under IFRS for SMEs, how must all business combinations be accounted for?
- Using the pooling-of-interests method
- Using the purchase (acquisition) method (Correct answer)
- Using the equity method
- Using proportionate consolidation
Correct answer: Using the purchase (acquisition) method
IFRS for SMEs Section 19 requires all business combinations to be accounted for using the purchase (acquisition) method without exception.
Question 2: Under IFRS for SMEs, when the useful life of goodwill cannot be estimated reliably, it is presumed to be amortized over a maximum of:
- 5 years
- 10 years (Correct answer)
- 20 years
- 40 years
Correct answer: 10 years
IFRS for SMEs Section 19.23 presumes goodwill has a useful life of 10 years when a reliable estimate cannot be made.
Question 3: On the acquisition date in a business combination, the acquirer measures identifiable assets acquired and liabilities assumed at:
- Historical cost
- Book value in the acquiree's records
- Fair value (Correct answer)
- The lower of cost or net realizable value
Correct answer: Fair value
Under IFRS for SMEs Section 19, identifiable assets and liabilities are measured at their fair values at the acquisition date.
Question 4: Under IFRS for SMEs, if the cost of a business combination is less than the fair value of identifiable net assets acquired (negative goodwill), the acquirer should:
- Recognize the excess as a gain in profit or loss immediately (Correct answer)
- Recognize the excess as a deferred credit
- Reduce the fair values of acquired assets proportionately
- Record the excess directly in equity as a capital reserve
Correct answer: Recognize the excess as a gain in profit or loss immediately
Under IFRS for SMEs Section 19, any excess of fair value of net identifiable assets over cost is recognized immediately as a gain in profit or loss.
Question 5: Under IFRS for SMEs, goodwill is tested for impairment:
- Annually regardless of indicators
- Only when impairment indicators exist (Correct answer)
- Every five years as a mandatory review
- At each interim reporting period
Correct answer: Only when impairment indicators exist
IFRS for SMEs uses a trigger-based approach, requiring impairment testing of goodwill only when indicators of impairment are present.
Question 6: Under IFRS for SMEs Section 19, the cost of a business combination includes directly attributable acquisition costs (e.g., legal fees). How does this differ from full IFRS (IFRS 3)?
- Both standards expense acquisition costs immediately
- IFRS for SMEs capitalizes acquisition costs; full IFRS expenses them (Correct answer)
- Both standards capitalize acquisition costs into goodwill
- Full IFRS capitalizes acquisition costs; IFRS for SMEs expenses them
Correct answer: IFRS for SMEs capitalizes acquisition costs; full IFRS expenses them
IFRS for SMEs includes directly attributable acquisition costs in the cost of the combination, whereas full IFRS 3 requires these costs to be expensed as incurred.
Question 7: Which of the following is a condition for recognizing an intangible asset separately from goodwill in a business combination under IFRS for SMEs?
- It must have a finite useful life
- It must be separable or arise from contractual or legal rights (Correct answer)
- It must have been previously recognized by the acquiree
- It must generate revenue independently
Correct answer: It must be separable or arise from contractual or legal rights
An intangible asset is recognized separately from goodwill if it is separable from the entity or arises from contractual or other legal rights, meeting the definition of an asset.
IFRS for SMEs) IFRS for SMEs Business Combinations and Goodwill 1
Under IFRS for SMEs, how must all business combinations be accounted for?