IFRS Consolidation and Group Accounting 2 — Questions and Answers
Question 1: Under IAS 28, the equity method requires an investor to recognize its share of the associate's post-acquisition profit or loss. Where is this recognized?
- Directly in other comprehensive income
- In the investor's profit or loss (Correct answer)
- As an adjustment to goodwill
- As a separate reserve within equity
Correct answer: In the investor's profit or loss
Under IAS 28, the investor recognizes its share of the associate's profit or loss in the investor's own profit or loss, increasing or decreasing the carrying amount of the investment.
Question 2: Under IFRS 3, how are acquisition-related costs (such as legal and advisory fees) treated?
- Capitalized as part of the cost of the business combination
- Added to goodwill
- Expensed in the period in which they are incurred (Correct answer)
- Deferred and amortized over the useful life of the acquired business
Correct answer: Expensed in the period in which they are incurred
IFRS 3 requires that acquisition-related costs be expensed as incurred rather than capitalized, as they are not part of the exchange for the acquiree.
Question 3: What is contingent consideration in a business combination under IFRS 3, and how is it initially recognized?
- Additional purchase price that may be paid depending on future events; recognized at fair value at acquisition date (Correct answer)
- Costs contingent on obtaining regulatory approval; recognized when probable
- Earn-out payments recognized only when the condition is met
- Deferred payment recognized at the undiscounted amount due
Correct answer: Additional purchase price that may be paid depending on future events; recognized at fair value at acquisition date
IFRS 3 defines contingent consideration as an obligation to transfer additional assets or equity interests if specified future events occur or conditions are met, and it must be recognized at fair value at the acquisition date.
Question 4: Under IFRS 3, when an acquirer obtains control in stages (step acquisition), what happens to the previously held equity interest at the acquisition date?
- It is carried forward at its original cost basis
- It is remeasured to fair value, with any resulting gain or loss recognized in profit or loss (Correct answer)
- It is derecognized with no gain or loss recognized
- It is reclassified to retained earnings
Correct answer: It is remeasured to fair value, with any resulting gain or loss recognized in profit or loss
In a step acquisition under IFRS 3, the acquirer remeasures its previously held equity interest in the acquiree at the acquisition-date fair value, recognizing any resulting gain or loss in profit or loss.
Question 5: When a parent loses control of a subsidiary, how should the retained investment (if any) be measured under IFRS 10?
- At the original cost of the retained shares
- At the carrying amount of the investment immediately before loss of control
- At fair value at the date control is lost (Correct answer)
- At the lower of carrying amount or recoverable amount
Correct answer: At fair value at the date control is lost
Under IFRS 10, upon loss of control any retained interest is remeasured to fair value at the date control is lost, with the resulting gain or loss recognized in profit or loss.
Question 6: Under IAS 36, goodwill acquired in a business combination must be allocated to which units for impairment testing?
- Individual assets that were acquired in the business combination
- Cash-generating units (CGUs) or groups of CGUs expected to benefit from the synergies of the combination (Correct answer)
- The entire entity as a single unit of account
- Geographic segments only
Correct answer: Cash-generating units (CGUs) or groups of CGUs expected to benefit from the synergies of the combination
IAS 36 requires goodwill to be allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the business combination for the purpose of impairment testing.
Question 7: How should a joint operation be accounted for by a party that has joint control under IFRS 11?
- Using the equity method
- Using proportionate consolidation for all assets
- Recognizing its own assets, liabilities, revenues, and expenses, plus its share of joint assets, liabilities, revenues, and expenses (Correct answer)
- Only disclosing the arrangement in the notes without recognition
Correct answer: Recognizing its own assets, liabilities, revenues, and expenses, plus its share of joint assets, liabilities, revenues, and expenses
Under IFRS 11, a party to a joint operation recognizes its own assets, liabilities, revenues, and expenses, as well as its share of jointly held or incurred items, directly in its financial statements.
IFRS Consolidation and Group Accounting 2
Under IAS 28, the equity method requires an investor to recognize its share of the associate's post-acquisition profit or loss.
Where is this recognized?