International Financial Reporting Standards_guide.pdf

Chapter 6 Business Combinations (IFRS 3) 65
TABLE 6.2 Contingent Consideration: Illustration of Recognition and Measurement
IAS 39 Liability IAS 37 Liability Equity Asset
Classify
An obligation to settle
in cash and it meets
the definition of a
financial liability per
IAS 32.
An obligation to settle
in cash and it meets
the definition of an
IAS 37 provision.
An obligation that
will be settled by the
issue of the acquirer’s
own equity.
A right to receive
a reimbursement
of consideration
transferred if a certain
event occurs.
Initial
recognition and
measurement
At fair value per IAS
39, for example, as a
payable.
At fair value per IAS
37 as a provision.
At fair value as a
reserve in equity.
At fair value per IAS
39, for example, as a
receivable.
Fair value
movements
before settlement
In accordance with
IAS 39, that is,
through profit or loss.
In accordance with
IAS 37, that is, the
best estimate of
amount payable
to third party
and movement
recognized in profit
or loss.
No fair value
remeasurements are
permitted after initial
recognition.
At fair value per IAS
39, that is, either
designated through
profit or loss or
amortized cost. *
Settlement
Derecognize the
entire liability and
account for the cash
paid.
Derecognize the
entire liability and
account for the cash
paid.
Derecognize the
other reserve and
raise share capital
and share premium
as necessary.
Derecognize entire
asset and account
for the cash or other
asset received.
Non-occurrence
of contingency
Derecognize the
entire liability and
take the contra entry
through profit or loss.
Derecognize the
entire liability and
take the contra entry
through profit or loss.
Derecognize the
entire equity reserve
item within equity,
for example, against
retained earnings.
Derecognize the
asset and take the
contra entry through
profit or loss. Any fair
value adjustments in
other comprehensive
income must be
recycled to profit or
loss in full.
* IFRS 3 requires that contingent consideration assets are subsequently measured at fair value. The recognition and measurement rules override
those of IAS 39 and therefore they can be classified as receivables but be carried at fair value instead of amortized cost.
6.4.18 In a business combination achieved in stages (a step acquisition), the acquirer
obtains control of an entity in which it already held an interest, that is, an IAS 39 investment
or an investment in an associate or joint venture. Any change in the nature of an investment
such as a change from significant influence to control is considered to be an economic trigger
for fair value measurement. The acquirer is deemed to dispose of the previous interest held
at fair value at acquisition date. The acquirer must remeasure the previous interest to fair
value and recognize a gain or loss in profit or loss for the difference between this fair value
and the carrying amount of the investment. The fair value calculated must be included as part
of consideration paid.