Guide: Accounting for Acquisition of an Asset or a Group of Assets

Introduction

In some instances, an acquired entity may not qualify as a business under IFRS 3. This is often the case when the entity is a legal structure with the purpose to primarily hold one or more significant assets, and lacking operations that have actual or potential business outputs.

According to IFRS 3, if the purchase constitutes an asset acquisition, “the acquirer shall identify and recognise the individual identifiable assets acquired (including those assets that meet the definition of, and recognition criteria for, intangible assets in IAS 38 Intangible Assets) and liabilities assumed. The cost of the group shall be allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. Such a transaction or event does not give rise to goodwill.” [IFRS 3.2(b)]. Additionally, in these circumstances, transaction costs are typically capitalized. No deferred taxes are recognized initially. And contingent considerations are only recognized according to relevant IFRS standards.

The approach outlined by the IFRS Interpretations Committee advises (1) initially allocating the transaction price to assets and liabilities based on their standalone fair values. Subsequently, (2) each is measured as per applicable standards, adjusting their carrying amounts accordingly.

Illustrative Example

Consider a scenario where a company is acquired for $500 in cash, which includes buildings and inventories but has no employees or operations. The first step involves allocating the purchase cost to the identifiable assets and liabilities based on their fair values. Assume that these individual fair values were determined as follows:

After valuation, assume the following fair value allocations:

The corresponding accounting entry is as follows:

Secondly, if material differences arise between the transaction price and the sum of the fair values, Interpretations Committee recommends revisiting the fair values and calculations to ensure complete identification and accurate valuation of assets and liabilities. Let’s assume in this case that the company revisited the inputs, and found no issues with them so no revisions were needed.

The third step is applying relevant accounting standards for initial measurements. For example, Property, Plant & Equipment (PP&E) can retain its acquisition value as it is measured at cost per IAS 16, while inventory must be carried at a lower of carrying amount and the net realisable value (NRV) per IAS 2. Given that its NRV is lower, the inventory has to be written down which impacts statement of profit or loss. As a result, the inventory’s carrying amount on the statement of financial position will be reduced to $65.

The corresponding accounting entry is as follows:

Conclusion

This guide demonstrates the accounting process for acquisitions that do not constitute a business. Key steps include identifying all assets and liabilities, correctly assessing their fair values, allocating the transaction price, and applying the correct accounting standards for initial measurement.