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Preparation of Consolidated Financial StatementsIFRS 3IAS 12ConsolidationSection B

ACCA · Question 27 · Preparation of Consolidated Financial Statements

SECTION B

CASE SCENARIO: Quantum Logistics Group acquired 100% of the equity of a foreign subsidiary, Velocity Trans, on 1 January 20X9. Quantum paid $5,000,000 in cash and agreed to pay further contingent consideration in two years. The present value of this contingent consideration at acquisition was $1,000,000. At acquisition, Velocity Trans had an internally generated brand not recognized in its financial statements, with an estimated fair value of $2,000,000. The applicable tax rate is 20%. Velocity Trans is currently defending a legal claim from a customer. Quantum's legal team estimates a 60% probability of losing and paying $3,000,000, and a 40% probability of losing and paying $1,000,000. Velocity Trans's functional currency is the Dinar, while Quantum's is the Dollar.

QUESTION: What is the net increase to the fair value of Velocity Trans's identifiable net assets at acquisition due to the unrecorded brand?

Answer options:

A.

$2,000,000

B.

$1,600,000

C.

$0

D.

$2,400,000

How to approach this question

Recognize the brand at fair value. Calculate the deferred tax liability on this fair value adjustment. The net increase is the fair value minus the deferred tax.

Full Answer

B.$1,600,000✓ Correct
Under IFRS 3, identifiable intangible assets (like brands) of the acquiree must be recognized at fair value ($2,000,000), even if internally generated and unrecorded by the subsidiary. This creates a taxable temporary difference because the tax base is zero. A deferred tax liability is recognized: $2,000,000 * 20% = $400,000. The net increase to identifiable net assets is $1,600,000.

Common mistakes

Forgetting to account for deferred tax on fair value adjustments during consolidation.
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