Question

We (the parent) acquired a company (the subsidiary) and we identified that the company does not constitute a business, therefore we cannot follow the acquisition method under IFRS 3.

The subsidiary only owns some assets and liabilities and we need to account for this transaction as for the asset acquisition. But how? Should we prepare consolidated financial statements since we only acquired assets and liabilities?

Also, should we show acquired assets also in our separate financial statements?
 

Answer

I am assuming here that the company you acquired is still a legal entity producing its own reporting (financial statements) and thus there is no direct transfer of assets from the acquired company (subsidiary) to the parent.

Let me split my answer into several parts:

I. Consolidated financial statements

IFRS 3 Business Combinations applies only when you acquire a business.

Under IFRS 10 Consolidated financial statements, you still have to consolidate a subsidiary even if it does not constitute a business, so yes, you do prepare consolidated financial statements.

The first thing is to apply the requirement of IFRS 3.3 that prescribes to account for similar transaction as an asset acquisition. More specifically, goodwill does not arise in the asset acquisition. Instead you need to allocate the cost of investment between the individual identifiable assets and liabilities in the group based on their relative fair values at the acquisition date.

Non-controlling interest can arise though, if you acquired less than 100% share in the subsidiary.

Let me give you short illustration for consolidated financial statements:

Let’s say you paid CU 80 000 to acquire 80% share in a company A. You assessed that it is NOT a business, thus you need to account only for the asset acquisition. Company A owns a building with fair value of CU 70 000 and a machine with fair value of CU 10 000.

In the consolidated financial statements, you will recognize the building and the machine at their allocated share on the fair value of consideration transferred, no goodwill.

The cost of group of assets equals to:

  • Fair value of consideration given (what you paid): CU 80 000; plus
  • Non-controlling interest: CU 20 000 (CU 80 000 paid for 80% means that the fair value of the remaining 20% is CU 20 000);
  • Total cost = CU 100 000

The journal entry in the consolidation is therefore:

  • Debit PPE – building: CU 87 500 (CU 100 000*CU 70 000/(CU 70 000+CU 10 000)) – here, were allocating total cost of 100 000 to the individual assets based on their relative share on total fair value)

  • Debit PPE – machine: CU 12 500 (CU 100 000*CU 10 000/(CU 70 000+CU 10 000))

  • Credit Cash: CU 80 000

  • Credit Non-controlling interest: CU 20 000

This is different from accounting if a subsidiary would have been a business, because you would show also goodwill (of CU 20 000), and assets in their fair values (building of CU 70 000 and machine of CU 10 000).
 

II. Separate financial statements

As for the separate financial statements, you should follow IAS 27 that requires to present the investment in a subsidiary either at cost, or in line with IFRS 9 as a financial instrument or by the equity method.

So, the parent will not show individual assets in its separate financial statements, but the investment in a subsidiary.