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ACCA Strategic Professional · Strategic Business Reporting (International) · Provisions, contingencies and events after the reporting period

Parent plc acquired 80% of Sub Ltd on 1 January 20X5. At the acquisition date Sub was defending a lawsuit. The fair value of the potential obligation was reliably measured at $3 million, though an outflow was only possible, not probable. How should Parent treat this in the consolidated financial statements under IFRS 3?

Parent should recognise a $3 million liability in the acquisition accounting, increasing goodwill. IFRS 3 departs from IAS 37 by recognising present-obligation contingent liabilities at fair value on acquisition, even where the outflow is not probable, provided fair value is reliably measurable.

  1. AIgnore it, as it does not meet IAS 37 recognition criteria
  2. BDisclose it only, as a contingent liability of the group
  3. CRecognise a liability of $3 million in the acquisition accounting, which increases goodwillCorrect
  4. DRecognise a $3 million provision as a post-acquisition expense in profit or loss

Explanation

IFRS 3 requires contingent liabilities that are present obligations arising from past events, with reliably measurable fair value, to be recognised at the acquisition date even if an outflow is not probable. This reduces net assets acquired and so increases goodwill. Charging it to post-acquisition profit or only disclosing it would be wrong.

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