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

Vega Group acquired 100% of Lyra Ltd on 1 July. At the acquisition date, Lyra was defending a lawsuit. Vega's valuers estimate the fair value of the obligation at $1.5m, although the outflow is only possible, not probable. Under IFRS 3, how should Vega treat this in the consolidated financial statements at acquisition?

Vega should recognise a $1.5m liability within the identifiable net assets acquired, which increases goodwill. IFRS 3 requires present-obligation contingent liabilities to be recognised at fair value in a business combination even when outflow is not probable, unlike the IAS 37 rule for ordinary entities.

  1. ADisclose only, because the outflow is not probable
  2. BRecognise a liability of $1.5m as part of the identifiable net assets acquired, increasing goodwillCorrect
  3. CRecognise the $1.5m as an expense in post-acquisition profit or loss
  4. DRecognise a provision in Lyra's books only

Explanation

IFRS 3 requires a contingent liability to be recognised at acquisition if it is a present obligation arising from past events and its fair value can be measured reliably, even if outflow is not probable. The liability reduces net assets acquired and so increases goodwill. The IAS 37 disclosure-only approach does not apply in a business combination.

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