Business combinations, consolidation, equity and disclosure
Property, Plant and Equipment (IAS 16)
Recognition and initial measurement
Capitalise when future economic benefits are probable and cost is reliably measurable. Cost includes the purchase price net of discounts, non-recoverable duties and taxes, directly attributable costs of bringing the asset to the location and condition for its intended use, the initial estimate of dismantling and restoration costs, and capitalised borrowing costs for qualifying assets. Subsequent expenditure is capitalised only if it replaces a component or enhances benefits; day-to-day servicing is expensed. Major inspections are treated as a separate component.
Subsequent measurement
Choose the cost model or the revaluation model and apply it to an entire class. Under revaluation, fair value replaces carrying amount, depreciation continues on the revalued amount, and the surplus goes to OCI and accumulates in equity. A revaluation decrease goes to profit or loss unless it reverses a previous surplus on the same asset (then to OCI); an increase goes to OCI unless it reverses a previous expense (then to profit or loss).
Depreciate component by component from the date the asset is available for use; review residual value, useful life and method at least annually. Land is generally not depreciated.
Traps
On disposal, a revaluation surplus is transferred directly to retained earnings within equity - it is not recycled to profit or loss. Third-party compensation for impairment is recognised in profit or loss when receivable, separately from the impairment loss. Government grants (IAS 20) are recognised in profit or loss over the periods in which the related costs are incurred.
Worked example
Cost 1,000,000, ten-year life, straight line. After two years the carrying amount is 800,000 and the asset is revalued to 1,100,000: a 300,000 uplift goes to OCI, and depreciation becomes 137,500 over the remaining eight years. Rule of thumb: revalue, then restart depreciation on the new carrying amount.
Business Combinations (IFRS 3)
The acquisition method
Four steps: identify the acquirer, determine the acquisition date, recognise and measure identifiable assets acquired and liabilities assumed at fair value, and recognise goodwill or a gain from a bargain purchase.
Goodwill = consideration transferred + non-controlling interest + fair value of any previously held interest − net fair value of identifiable assets acquired and liabilities assumed. NCI is measured either at fair value (full goodwill) or at its proportionate share of identifiable net assets (partial goodwill).
Consideration includes cash, assets transferred and liabilities assumed at fair value, plus contingent consideration at acquisition-date fair value (classified as equity or liability; liability remeasurements go to profit or loss). Acquisition-related costs are expensed. Identifiable intangibles such as brands, customer relationships and technology are recognised separately from goodwill where they meet the contractual-legal or separability criteria. Contingent liabilities are recognised at fair value if they are present obligations, not subject to the IAS 37 probability test. Pre-existing relationships are settled separately. Measurement-period adjustments, within one year, are applied retrospectively.
Traps
A bargain purchase gain is recognised in profit or loss only after reassessing the identification and measurement of assets, liabilities, NCI and consideration. In a step acquisition, the previously held interest is remeasured to fair value through profit or loss.
Worked example
Consideration 1,200,000; NCI 20% at proportionate share; identifiable net assets 1,000,000. NCI = 200,000. Goodwill = 1,200,000 + 200,000 − 1,000,000 = 400,000. Rule of thumb: goodwill is the plug, not the starting point.
Consolidation, Equity and Disclosure
Control and consolidation (IFRS 10)
Control exists when the investor has power over the relevant activities, exposure or rights to variable returns, and the ability to use that power to affect the returns. Consolidate from the date control is obtained and deconsolidate when it is lost, remeasuring any retained interest at fair value through profit or loss.
Consolidation procedures: combine like items, eliminate intragroup balances, transactions, income and expenses in full, eliminate unrealised profits in full (attributing the NCI share), align accounting policies, and present NCI within equity separately from owners of the parent.
Joint arrangements are joint operations (recognise the share of assets, liabilities, revenue and expenses) or joint ventures (equity method). Significant influence, normally presumed at 20% or more, creates an associate accounted for under the equity method: cost plus share of post-acquisition profit, less dividends and impairment.
Equity
Present share capital, share premium, retained earnings, other components of equity (revaluation surplus, remeasurements, hedging reserve) and treasury shares, which are deducted from equity. Dividends are recognised when declared and legally payable. Bonus issues and share splits do not change total equity, but per-share amounts are restated retrospectively.
Disclosure
Disclose significant judgements, key sources of estimation uncertainty, capital management and, for groups, interests in other entities (IFRS 12) and operating segments (IFRS 8).
Trap
A change in accounting policy is applied retrospectively; a change in accounting estimate is applied prospectively. Examiners test this distinction constantly.
Worked example
Parent buys 80% for 800,000 when subsidiary net assets are 700,000. NCI = 140,000; goodwill = 800,000 + 140,000 − 700,000 = 240,000.