ACCT6010 · Financial Reporting For Business Groups
Business Combinations
When one entity obtains control of a business, AASB 3 requires the acquisition method: identify the acquirer and acquisition date, recognise the acquiree's identifiable assets and liabilities at acquisition-date fair value — including some the acquiree could not book itself — and recognise the residual as goodwill or, rarely, a gain on bargain purchase. The goodwill formula is consideration + NCI + previously-held interest − FVINA, and the single most-tested discipline is that FVINA is struck net of tax: every fair-value adjustment changes carrying amount but not tax base, so it drags a deferred tax balance and enters FVINA at ×(1 − tax). This analysis feeds the pre-acquisition elimination, so getting goodwill right anchors the whole worksheet. You must compute net-of-tax FVINA, apply the goodwill formula, switch the NCI term on for partly-owned subsidiaries, and handle contingent consideration and bargain purchases.
What this chapter covers
- 013.1 The acquisition method — four steps (AASB 3.4–5)
- 023.2 The goodwill formula (AASB 3.32)
- 033.3 FVINA measured net of tax
- 043.4 Gain on bargain purchase — reassess first
- 053.5 Partial acquisition — the NCI term and full vs partial goodwill
- 063.6 Contingent consideration (AASB 3.39–40, 58)
Worked example: goodwill with a partly-owned subsidiary
- +1Partial method — measure NCI at its share of FVINA: NCI = 20% × 818 = 163.6.
- +1Apply the formula (partial): Goodwill = consideration 800 + NCI 163.6 − FVINA 818 = 145.6 — only the parent's goodwill is recognised.
- +1Full method — measure NCI at fair value: NCI = 205 (may carry a control-premium element).
- +1Apply the formula (full): Goodwill = 800 + 205 − 818 = 187 — goodwill now includes the NCI's share, so it is higher.
- +1State the consequence: the method is an accounting policy election per combination, and it changes how a later goodwill impairment is shared between parent and NCI (AASB 136).
Key terms
- Acquisition method
- The AASB 3 method for a business combination: identify the acquirer and acquisition date, recognise and measure the acquiree's identifiable assets and liabilities at acquisition-date fair value, and recognise goodwill or a gain on bargain purchase.
- FVINA
- Fair value of identifiable net assets — the acquiree's book equity plus the after-tax fair-value adjustments. It is measured net of tax because each adjustment carries deferred tax, and it is the figure subtracted in the goodwill formula.
- Goodwill (AASB 3.32)
- The residual: consideration transferred + NCI + fair value of any previously-held interest − FVINA. It represents the premium for synergies, workforce and market position; it is capitalised, never amortised, and impairment-tested.
- Gain on bargain purchase
- A negative residual — net assets acquired worth more than was paid. The standard requires you to reassess all amounts first (most bargains are a missed liability or overstated asset); any genuine excess is recognised as a gain in profit or loss, attributed to the acquirer.
- Contingent consideration
- An earn-out payable only if the acquiree hits future targets. It is included in consideration at its acquisition-date fair value (so it feeds goodwill); later changes go to profit or loss for liability-classified amounts, and goodwill is not re-opened.
Business Combinations FAQ
Why is FVINA measured net of tax?
Because a consolidation fair-value adjustment changes an asset's carrying amount but not its tax base, creating a temporary difference (AASB 112.19). A $100 upward adjustment at 30% therefore carries a $30 deferred tax liability and adds only $70 to FVINA. Using book equity understates FVINA and overstates goodwill; using gross adjustments overstates FVINA and understates goodwill — only the net-of-tax figure is correct.
What is the difference between full and partial goodwill?
It is how you measure the NCI in the goodwill formula. Partial (proportionate) goodwill measures NCI at its share of FVINA, so only the parent's goodwill is recognised. Full goodwill measures NCI at fair value, grossing up for the NCI's share, so total goodwill is higher. The choice is a policy election per combination and affects how a later impairment is shared.
How is a gain on bargain purchase treated, and how is that different from goodwill?
Opposite treatments. Positive goodwill is capitalised as an asset, impairment-tested and never written back. A negative residual is a gain on bargain purchase: you reassess all the amounts first, then take any genuine excess straight to profit or loss in the period of acquisition. One sits on the balance sheet; the other hits the income statement immediately.
Is goodwill amortised?
No. Recognised goodwill is an asset that is not amortised; it is impairment-tested at least annually under AASB 136, and that impairment is irreversible — once written down it can never be written back up. Whether impairment-only is better than the old amortisation regime is an examinable critique.
Exam move
Memorise the goodwill formula and the four acquisition-method steps, then make net-of-tax FVINA automatic: book equity, plus asset uplifts × (1 − 0.30), minus recognised liabilities × (1 − 0.30). Practise the same scenario at 100% and at a partial holding so the NCI term switches on cleanly, and be able to produce both the partial and full goodwill columns. Keep a checklist for the edge cases: a negative residual means reassess then book a gain; contingent consideration enters at acquisition-date fair value and does not re-open goodwill later; and distinguish a measurement-period adjustment (retrospective, touches goodwill) from a post-acquisition remeasurement (to profit or loss).
