Transition to IFRS - adjuistments

[marea]

Hi,
I have one question regarding the transition to IFRS. Let´s assume that at the date of transition to IFRS, a company has a liability on its SOFP that relates to a contingent consideration recognized at the acquisition date under the local GAAP. The business combination incurred in one of the previous periods. According to IFRS, such liability would not have been recognized at the acquisition date. My question is, whether this adjustment would be recognized in retained earnings in the opening SOFP, even though at the acquisition date, it impacted the calculation of goodwill. I understand that unless there was an intangible asset subsumed in goodwill, all other adjustments are recognized in retained earnings or some other category within equity (IFRS1.C4). The company applies the optional exemption for Business combinations.
Is my understanding correct?

[marea]

I appologise if I posted a silly question, but could anyone help? Even the explanation why my question does not make sense would be very welcome

[Marek Muc]

For me, IFRS 1 is something that needs refreshing and this is why I'm not so keen to participate in these discussions. But what surprises me is that you believe that contingent consideration recognised under previous GAAP would not be recognised under IFRS - why?

[exIFRS]

I am in the same boat as @Marek, IFRS 1 was a long time ago, and I was hoping someone with more recent knowledge might have something to say , but I thought I might pull out my old notes tonight and have a look (time permitting).

[marea]

Thank you both. Unfortunately, I still need to follow IFRS 1 as it is . I would be greatful if you could provide your thoughts about it. Also, whether and how would this adjustment impact separate FS.


@Marek. The additional payment that was recognised as contingent consideration would be treated as remuneration for services provided in the periods subsequent to the acquisition under IFRS. Therefore, it would not be accounted for under IFRS 3.

[Marek Muc]

Ok, clear re. contingent consideration.
I plan to prepare a proper page on IFRS 1 for our knowledge base, but now I can't promise any timely input as I'm currently travelling.

So it seems that your best chance now is generous help from exIFRS

[marea]

@ Marek,Thank you for including this topic into the knowledge base. I´m sure it will be useful for many accountants when preparing their first IFRS financial statements.

@exIFRS, I would be greatful if you could share your opinion about my concerns.

[exIFRS]

@marea I would agree with your reading of IFRS 1. IFRS 1.C4(h) is emphatic, no adjustments (other than for intangible assets and impairment (C4(g)). As you rightly point out if the liability was in reality employee expense it should be restated through Retained Earnings. This means effectively goodwill is larger than it otherwise would have been (and expenses were understated by the employee expense) increasing the possibility of impairment.

[marea]

Thank you so much for your input exIFRS. I agree with the possibility of impairment.

With regard to the separate financial statements, would the adjustment be the same, or would it decrease the investment?

[exIFRS]

On what basis is the investment being measured in the separate financial statements? I presume cost?

[marea]

Yes, at cost

[exIFRS]

D15 If a first-time adopter measures such an investment at cost in accordance with IAS 27, it shall measure that investment at one of the following amounts in its separate opening IFRS statement of financial position:
(a) cost determined in accordance with IAS 27; or
(b) deemed cost. The deemed cost of such an investment shall be its:
(i) fair value at the entity’s date of transition to IFRSs in its separate financial statements; or
(ii) previous GAAP carrying amount at that date.

[marea]

I must have missed that part.
Thank you very much exIFRS.