ACCA Strategic Professional · Strategic Business Reporting (International) · Employee benefits
Omega Co, a parent, has a subsidiary Sigma acquired during the year. Sigma had a termination plan announced by the acquirer's board after the acquisition date. It was not a condition of the acquisition and not committed to by Sigma before acquisition. Omega's consolidation team proposes to include the $3m expected termination cost as a liability in the fair value of Sigma's net assets at acquisition. Which treatment is correct under IFRS Standards?
Omega should expense the $3m in post-acquisition consolidated profit or loss when the IAS 19 criteria are met. Under IFRS 3, only acquiree obligations existing at the acquisition date enter the fair value of net assets, so the acquirer's later restructuring intentions cannot be added to liabilities or goodwill.
- AInclude the liability in net assets acquired, increasing goodwill by $3m
- BRecognise the cost in the post-acquisition consolidated profit or loss when the IAS 19 recognition criteria are metCorrect
- CCharge $3m directly to retained earnings at acquisition
- DInclude it as a contingent liability in the acquisition accounting
Explanation
IFRS 3 recognises only liabilities of the acquiree existing at the acquisition date. Restructuring or termination costs the acquirer intends to incur are not liabilities of the acquiree at that date, so they are not part of acquisition accounting. They are post-combination expenses recognised under IAS 19 when its criteria are met. Adding $3m to goodwill is therefore wrong.
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