This document contains a multiple choice quiz on accounting for business combinations under IFRS 3. The questions cover key topics in IFRS 3 including: the purchase method of accounting being the only acceptable method, treatment of identifiable intangible assets, goodwill, impairment testing of goodwill, and negative goodwill. Correct answers are provided for each multiple choice question.
This document contains a multiple choice quiz on accounting for business combinations under IFRS 3. The questions cover key topics in IFRS 3 including: the purchase method of accounting being the only acceptable method, treatment of identifiable intangible assets, goodwill, impairment testing of goodwill, and negative goodwill. Correct answers are provided for each multiple choice question.
This document contains a multiple choice quiz on accounting for business combinations under IFRS 3. The questions cover key topics in IFRS 3 including: the purchase method of accounting being the only acceptable method, treatment of identifiable intangible assets, goodwill, impairment testing of goodwill, and negative goodwill. Correct answers are provided for each multiple choice question.
methods must be applied to all business combinations under IFRS 3, Business Combinations? (a) Pooling of interests method. (b) Equity method. (c) Proportionate consolidation. (d) Purchase method. Answer: (d) 2. Purchase accounting requires an acquirer and an acquiree to be identified for every business combinations. Where a new entity (H) is created to acquire two preexisting entities, S and A, which of these entities will be designated as the acquirer? (a) H. (b) S. (c) A. (d) A or S. Answer: (d) 3.A. IFRS 3 requires all identifiable intangible assets of the acquired business to be recorded at their fair values. Many intangible assets that may have been subsumed within goodwill must be now separately valued and identified. Under IFRS 3, when would an intangible asset be identifiable? (a) When it meets the definition of an asset in the Framework document only. (b) When it meets the definition of an intangible asset in IAS 38, Intangible Assets, and its fair value can be measured reliably. (c) If it has been recognized under local generally accepted accounting principles even though it does not meet the definition in IAS 38. (d) Where it has been acquired in a business combination. Answer: (a) B. Which of the following examples is unlikely to meet the definition of an intangible asset for the purpose of IFRS 3? (a) Marketing related, such as trademarks and internet domain names.
(b) Customer related, such as customer lists
and contracts. (c) Technology based, such as computer software and databases. (d) Pure research based, such as general expenditure on research. Answer: (d) C. An intangible asset with an indefinite life is one where (a) There is no foreseeable limit on the period over which the asset will generate cash flows. (b) The length of life is over 20 years. (c) The directors feel that the intangible asset will not lose value in the foreseeable future. (d) There is a contractual or legal arrangement that lasts for a period in excess of five years. Answer: (a) D. An intangible asset with an indefinite life is accounted for as follows: (a) No amortization but annual impairment test. (b) Amortized and impairment tests annually. (c) Amortize and impairment tested if there is a trigger event. (d) Amortized and no impairment test. Answer: (a) 4. An acquirer should at the acquisition date recognize goodwill acquired in a business combination as an asset. Goodwill should be accounted for as follows: (a) Recognize as an intangible asset and amortize over its useful life. (b) Write off against retained earnings. (c) Recognize as an intangible asset and impairment test when a trigger event occurs. (d) Recognize as an intangible asset and annually impairment test (or more frequently if impairment is indicated). Answer: (d) 5. If the impairment of the value of goodwill is seen to have reversed, then the company may
(a) Reverse the impairment charge and
credit income for the period. (b) Reverse the impairment charge and credit retained earnings. (c) Not reverse the impairment charge. (d) Reverse the impairment charge only if the original circumstances that led to the impairment no longer exist and credit retained earnings. Answer: (c) 6. On acquisition, all identifiable assets and liabilities, including goodwill, will be allocated to cash-generating units within the business combination. Goodwill impairment is assessed within the cash-generating units. If the combined organization has cash-generating units significantly below the level of an operating segment, then the risk of an impairment charge against goodwill as a result of IFRS 3 is (a) Significantly decreased because goodwill will be spread across many cash-generating units. (b) Significantly increased because poorly performing units can no longer be supported by those that are performing well. (c) Likely to be unchanged from previous accounting practice. (d) Likely to be decreased because goodwill will be a smaller amount due to the greater recognition of other intangible assets. Answer: (b) 7. Goodwill must not be amortized under IFRS 3. The transitional rules do not require restatement of previous balances written off. If an entity is adopting IFRS for the first time, and it wishes to restate all prior acquisitions in accordance with IFRS 3, then it must apply the IFRS to (a) Those acquisitions selected by the entity. (b) All acquisitions from the date of the earliest. (c) Only those acquisitions since the issue of the
IFRS 3 and IAS 22, Business Combinations,
to the earlier ones. (d) Only past and present acquisitions of entities that have previously and currently prepared their financial statements using IFRS. Answer: (b) 8. The excess of the acquirers interest in the net fair value of acquirees identifiable assets, liabilities, and contingent liabilities over cost (formerly known as negative goodwill) should be (a) Amortized over the life of the assets acquired. (b) Reassessed as to the accuracy of its measurement and then recognized immediately in profit or loss. (c) Reassessed as to the accuracy of its measurement and then recognized in retained earnings. (d) Carried as a capital reserve indefinitely. Answer: (b) 9. Which one of the following reasons would not contribute to the creation of negative goodwill? (a) Errors in measuring the fair value of the acquirees net identifiable assets or the cost of the business combination. (b) A bargain purchase. (c) A requirement in an IFRS to measure net assets acquired at a value other than fair value. (d) Making acquisitions at the top of a bull market for shares. Answer: (d) 10. The management of an entity is unsure how to treat a restructuring provision that they wish to set up on the acquisition of another entity. Under IFRS 3, the treatment of this provision will be (a) A charge in the income statement in the postacquisition period. (b) To include the provision in the allocated cost of acquisition. (c) To provide for the amount and, if the provision is overstated, to release the excess to the income statement in the postacquisition period. (d) To include the provision in the allocated
cost of acquisition if the acquired entity
commits itself to a restructuring within a year of acquisition. Answer: (a) 11. IFRS 3 requires that the contingent liabilities of the acquired entity should be recognized in the balance sheet at fair value. The existence of contingent liabilities is often reflected in a lower purchase price. Recognition of such contingent liabilities will (a) Decrease the value attributed to goodwill, thus decreasing the risk of impairment of goodwill. (b) Decrease the value attributed to goodwill, thus increasing the risk of impairment of goodwill. (c) Increase the value attributed to goodwill, thus decreasing the risk of impairment of goodwill. (d) Increase the value attributed to goodwill, thus increasing the risk of impairment of goodwill. Answer: (d) 12. IFRS 3 is mandatory for all new acquisitions from March 31, 2004. Entities have to cease the amortization of goodwill arising from previous acquisitions. The balance of goodwill arising from those acquisitions is (a) Written off against retained earnings. (b) Written off against profit or loss for the year. (c) Tested for impairment from the beginning of the next accounting year. (d) Tested for impairment on March 31, 2004. Answer: (c) 13. Entity A purchases 30% of the ordinary share capital of Entity B for $10 million on January 1, 2004. The fair value of the assets of Entity B at that date was $20 million. On January 1, 2005, Entity A purchases a further 40% of Entity B for $15 million, when the fair value of Entity Bs assets was $25 million. On January 1, 2004, Entity A does not have significant
influence over Entity B. What value would be
recognized for goodwill (before any impairment test) in the consolidated financial statements of A for the year ended December 31, 2005? (a) $11 million. (b) $7.5 million. (c) $9 million. (d) $14 million. Answer: (c) Goodwill At January 1, 2004: cost $10 million 30% of $20 million = 4 At January 1, 2005: cost $15 million 40% of $25 million = 5 9
(Entity A has not accounted for the
initial purchase as an associate.) 14. Corin, a private limited company, has acquired 100% of Coal, a private limited company, on January 1, 2005. The fair value of the purchase consideration was $10 million ordinary shares of $1 of Corin, and the fair value of the net assets acquired was $7 million. At the time of the acquisition, the value of the ordinary shares of Corin and the net assets of Coal were only provisionally determined. The value of the shares of Corin ($11 million) and the net assets of Coal ($7.5 million) on January 1, 2005, were finally determined on November 30, 2005. However, the directors of Corin have seen the value of the company decline since January 1, 2005, and as of February 1, 2006, wish to change the value of the purchase consideration to $9 million. What valueshould be placed on the purchase consideration and net assets of Coal as at the date of acquisition? (a) Purchase consideration $10 million, net asset value $7 million. (b) Purchase consideration $11 million, net asset
value $7.5 million.
(c) Purchase consideration $9 million, net asset value $7.5 million. (d) Purchase consideration $11 million, net asset value $7 million. Answer: (b) 15. Mask, a private limited company, has arranged for Man, a public limited company, to acquire it as a means of obtaining a stock exchange listing. Man issues 15 million shares to acquire the whole of the share capital of Mask (6 million shares). The fair value of the net assets of Mask and Man are $30 million and $18 million respectively. The fair value of each of the shares of Mask is $6 and the quoted market
price of Mans shares is $2. The share capital
of Man is 25 million shares after the acquisition. Calculate the value of goodwill in the above acquisition. (a) $16 million. (b) $12 million. (c) $10 million. (d) $6 million. Answer: (d) Cost of acquisition (Masks shareholders own 60% of equity of Man) In order for 40% of Masks shares to be owned by shareholders of Man, Mask needs to issue 4 million shares. Therefore, cost of acquisition is 4 million $6 each $24 million Fair value of assets of Man ($18 million) Goodwill $6 million