ACCA Applied Skills · Financial Reporting · Intangible assets
Larch Co acquired 80% of Pine Co. At the acquisition date Pine had an internally developed customer database, which met the definition of an intangible asset and whose fair value could be measured reliably at $300,000. It had never been recognised in Pine's own financial statements. Which treatment is correct in Larch's consolidated financial statements?
Larch should recognise the customer database separately at its full fair value of $300,000 as part of the identifiable net assets acquired. The fact that Pine never recognised it is irrelevant, as the recognition criteria are treated as met for assets acquired in a business combination, and this reduces goodwill.
- ARecognise it separately at $300,000 as part of the net assets acquiredCorrect
- BInclude it within goodwill because it was not recognised by Pine
- CExpense $300,000 to profit or loss at the acquisition date
- DRecognise it at $240,000, being the 80% owned by Larch
Explanation
Under IFRS 3 and IAS 38, an identifiable intangible acquired in a business combination is recognised separately at fair value, even if the acquiree never recognised it, because the fair value can be measured reliably. It reduces goodwill. Under the full goodwill method or proportionate method the asset is still recognised at 100% fair value, not 80%.
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