STUDENT ACTIVITY SECTION

1. SUMMARY OF LEARNING OBJECTIVES

Entities commonly trade with each other, exchanging one set of assets for another. When a grouping of assets, and/or liabilities, constitutes a business, the accounting for the exchange transaction is determined by IFRS 3 Business Combinations. IFRS 3 requires the application of the acquistion method under which the accountant must be able to identify which of the entities involved in the combination is the acquirer, determine the cost of the combination, and allocate this cost to the assets and liabilities acquired. The latter are recognised at fair value as a result of this process.

The residual amount in these calculations is classified as goodwill or gain on bargain purchase. Understanding the nature of goodwill is critical to understanding how to account for it. With the existence of the accounting standard on impairment of assets, goodwill is not required to be amortised. If a gain arises, current income is increased to recognise a bargain purchase.

With the release of an Exposure Draft detailing proposed changes to IFRS 3, an understanding of the areas of change and the philosophy behind the changes will assist in being prepared for changes when they occur.

2. DEMONSTRATION PROBLEMS

Demonstration Problem 1: Business combination with 3 entities involved

On 1 January 2004, Maori Ltd concluded agreements to take over the operations of War Ltd and to acquire the rest of the shares of Canoe Ltd. The balance sheets of the three companies as at that date were:

Maori Ltd War Ltd Canoe Ltd
Cash $20 000 $ 1 000 $ 12 500
Accounts receivable 35 000 19 000 30 000
Inventory 52 000 26 500 40 000
Property, plant & equipment (net) 280 500 149 500 107 500
Shares in Canoe Ltd (15 000 shares) 19 000 - -
Debentures in Paddles Ltd 45 000 18 000 ______ $451 500 $214 000 $190 000