Group financial statements and business combinations
What the exam tests
Control under IFRS 10, acquisition accounting under IFRS 3, consolidation adjustments, non-controlling interests (NCI), goodwill, associates under IAS 28 and joint arrangements under IFRS 11.
Core rules
- IFRS 10 control: power over relevant activities, exposure to variable returns, and ability to use power to affect returns.
- IFRS 3 acquisition method: identify the acquirer and acquisition date; recognise identifiable assets and liabilities at fair value with limited exceptions; measure consideration at fair value, including contingent consideration; expense acquisition-related costs.
- Goodwill = consideration + NCI + previously held interest − net identifiable assets. NCI is measured at fair value (full goodwill) or proportionate share (partial goodwill), elected transaction by transaction.
- Consolidate line by line, eliminate intragroup balances, income and dividends, and align accounting policies. NCI shares profit, OCI and equity.
- IAS 28 equity method: cost plus share of post-acquisition profit or OCI, less impairment and unrealised profits. Losses are limited to the investment plus long-term interests unless a legal or constructive obligation exists.
Worked example
Parent pays 800 for 80% of Subsidiary; NCI fair value is 180; identifiable net assets are 900. Goodwill = 800 + 180 − 900 = 80. If proportionate NCI is chosen: 80% × 900 = 720; goodwill = 800 + 720 − 900 = 620. Acquisition costs of 30 are expensed, not included in consideration. Contingent consideration of 50 is recognised at fair value at acquisition and remeasured through profit or loss unless it is an equity instrument.
Traps
- Capitalising acquisition costs.
- Mixing NCI measurement methods within one acquisition.
- Ignoring deferred tax on fair value uplifts.
- Forgetting equity-accounting adjustments for fair value depreciation and unrealised profit.