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Business CombinationsIFRS 3ConsolidationContingent LiabilitiesSyllabus E

ACCA · Question 12 · Business Combinations

SECTION A

Gamma Co acquired 80% of Delta Co on 1 January 20X2. At the acquisition date, Delta Co had an unrecorded contingent liability with a fair value of $150,000. By 31 December 20X2, the fair value of this contingent liability had increased to $180,000, though it still did not meet the criteria for recognition as a provision in Delta Co's individual financial statements.

How should this contingent liability be treated in the consolidated financial statements of Gamma Group for the year ended 31 December 20X2?

Answer options:

A.

Disclosed as a contingent liability only, as it does not meet IAS 37 recognition criteria.

B.

Recognized as a liability at $150,000.

C.

Recognized as a liability at $180,000.

D.

Ignored completely in the consolidated financial statements.

How to approach this question

Recall IFRS 3 rules for contingent liabilities assumed in a business combination. They are recognized at fair value at acquisition. For subsequent measurement, they are held at the higher of the amount that would be recognized under IAS 37 and the amount initially recognized less cumulative amortization.

Full Answer

B.Recognized as a liability at $150,000.✓ Correct
Under IFRS 3, a contingent liability assumed in a business combination is recognized at its fair value at the acquisition date ($150,000), even if it doesn't meet IAS 37 criteria. Subsequently, it is measured at the higher of: (a) the amount that would be recognized under IAS 37 (which is $0 here, as it still doesn't meet the criteria), and (b) the amount initially recognized less cumulative amortization ($150,000). Therefore, it remains recognized at $150,000.

Common mistakes

Remeasuring the liability to its new fair value of $180,000, or failing to recognize it at all because of IAS 37 rules.
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