ExpertMedium2 marksMultiple Choice
ACCA · Question 12 · Business Combinations
Section A
When acquiring SubCo, ParentCo agreed to pay an additional $1 million to the former owners if SubCo's profits exceed a certain target in the first year. At the acquisition date, the fair value of this contingent consideration was estimated at $600,000 and recorded as a liability. At the year-end, SubCo performed exceptionally well, and it is now certain the $1 million will be paid. How should the $400,000 increase in the liability be recorded?
Section A
When acquiring SubCo, ParentCo agreed to pay an additional $1 million to the former owners if SubCo's profits exceed a certain target in the first year. At the acquisition date, the fair value of this contingent consideration was estimated at $600,000 and recorded as a liability. At the year-end, SubCo performed exceptionally well, and it is now certain the $1 million will be paid. How should the $400,000 increase in the liability be recorded?
Answer options:
A.
As an increase to Goodwill
B.
As a deduction from Retained Earnings
C.
As an expense in profit or loss
D.
As an item of Other Comprehensive Income
How to approach this question
Recall IFRS 3 rules on contingent consideration. If it's a liability, post-acquisition changes in fair value go to P&L, not goodwill.
Full Answer
C.As an expense in profit or loss✓ Correct
According to IFRS 3 Business Combinations, contingent consideration classified as a financial liability must be remeasured to fair value at each reporting date. Because the change is due to post-acquisition events (exceptional performance), the resulting gain or loss is recognized in profit or loss, not as an adjustment to goodwill.
Common mistakes
Adjusting goodwill for the change, thinking it's an adjustment to the purchase price.
Practice the full ACCA FR — Financial Reporting Practice Exam 2
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