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ACCA Strategic Professional · Strategic Business Reporting (International) · Group accounting including statements of cash flows

Sigma acquired 75% of Tau on 1 January for $12m in cash plus a promise to pay a further $2m after one year if Tau's profit exceeds a target. At acquisition Sigma judged the target probable and the fair value of this contingent consideration was $1.6m. At the year end the fair value is reassessed at $2.0m because of better trading. Which treatment is correct under IFRS 3?

Sigma includes the $1.6m acquisition-date fair value in consideration for goodwill and recognises the later $0.4m increase in profit or loss. The liability is cash-settled and so is a financial liability, and post-acquisition changes do not alter goodwill.

  1. AInclude $1.6m in the cost of the business combination at acquisition and recognise the $0.4m increase in profit or loss, as the liability is a financial liabilityCorrect
  2. BInclude $2.0m in goodwill by adjusting it at the year end
  3. CExclude the contingent amount from goodwill until paid
  4. DRecognise the $0.4m increase as an adjustment to equity

Explanation

Contingent consideration is measured at acquisition-date fair value ($1.6m) and forms part of consideration. A cash-settled obligation is a financial liability, and later changes in fair value (not measurement-period adjustments for facts existing at acquisition) go to profit or loss. Adjusting goodwill or equity would be wrong.

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