Activity 4:

1. In accordance with IFRS 3, ADC is identified as the acquirer in this business

combination. The acquisition date is determined to be 1 May 20X5. ADC is required
to recognize and measure at fair value the identifiable assets acquired, liabilities
assumed, and non-controlling interest of OLH (with exceptions as stated by IFRS 3).
1.1 Fair Value of items recognized in OLHs statement of financial position
On-Line Homes (OLH)
Cash
Debtors, net
Mortgage loan receivables
PP&E
Intangible-software
TOTAL ASSETS
Deferred Tax
Payables
Provisions
Interest bearing liabilities
TOTAL LIABILITIES
NET ASSETS

Book Value
(OLH)
10
20
55
30
2
117
(30)
(10)
(10)
(50)
67

Tax Base(OLH)

Fair Value(OLH)

10
20
55
20
2

10
20
47
35
2

(30)
(10)

(30)
(10)
(15)

Notes:
1. A portion of mortgage receivables are at low fixed rates. Due to recent increases
in variable interest rates the fair value of these receivables is lower as a result. The
book value is not impacted as they are recognized at amortized cost.
2. As part of the due diligence process ADC obtained independent fair valuations of
the PP&E.
3. OLH customized an off-the-shelf software package. As part of the due diligence
process, an independent valuation estimated the fair value of the software to be
equal to its carrying amount.
4. The deferred tax asset arising from the provisions (i.e., CU 10 million x 30% = 3
million) is offset against the deferred tax liabilities arising from PP&E. This gives rise
to a net deferred tax position of zero in the books of OLH.
5. This figure only represents the deferred tax liability recognized by OLH. It does
not include the tax effect of the acquisition method as at the acquisition date this
is considered below.
6. A portion of these interest bearing liabilities are at fixed interest rates. Despite
the recent increases in variable interest rate, the fixed interest rate portion is in
excess of the current variable interest rates

1.2 Other items identified as part of the due diligence

In addition to the assets and liabilities recognized in OLHs statement of financial
position, the due diligence process identified the following:
a. OLH has a number of customer contracts relating to its on-line real estate
advertising business. As part of its due diligence, ADC obtained an independent
valuation of the se customer contracts. The fair value of these contracts was
estimated to be CU 15 million.
b. OLH also has a number of customers with which it provides on-line real estate
advertising on a regular basis. However, customer contracts do not exist for these
customers. An independent valuation was unable to provide a valuation by
reference to exchange transactions for the same or similar non-contractual
customer relationships.
c. An independent valuation of the internet domain name relating to OLHs online
real estate advertising (www.onlinehomes.com) est. its fair value to be CU 2 million
d. An independent valuation of OLHs brand name (Online Homes) estimated its fair
value to be CU 20 million.
e. OLH has maintained a database of all its customers relating to both businesses.
An independent valuation estimated the fair value of the customer database to be
CU 1 million.
f. OLH is undertaking an internal project to develop its own processing system. The
project is considered to be in the research phase; therefore all expenditure to date
has been expensed. However, the research findings to date are significant, and an
independent valuation has estimated the fair value of research to be CU 1 million.
g. The VIC Home Loan business entered into a premises lease agreement six years
earlier for a 10 year period. AT the time of entering the contract, the market was at
its peak and OLH negotiated a deal where the rent was fixed for 10 years. Since
then the market has dipped such that market rates for similar premises are less
than half of the amount of OLH is paying. OLH have a number of offices across the
country. The fair value is estimated to be CU 3 million
h. In addition, the real estate website business entered into an arrangement with a
complimentary website which provided clickthroughs to its site and banner
advertising. The contract was entered seven years earlier for a 10 year contract
when the internet was relatively new. Since then, the market rates for similar
contracts have increased significantly. OLH pay a fixed amount per year. Market rate
are significantly greater. The fair value of the contract is estimated to be CU 2
million.
i. A disgruntled customer is claiming damages of CU 10 million against OLH for
breach of contract. The case is still before the courts. The fair value of this
contingent liability is estimated to be CU 2 million.

1.3 Integrating OLH into ADCs existing business

ADC management intends to merge the ff. business units:
i.) OLHs Home Loans Victoria with ADCs Finance Victoria
ii.) OLHs Home Loans NSW with ADCs Finance NSW.
As part of its due diligence process, ADC developed the main features of an
integration plan that involves restructuring the activities of OLH. ADC estimates that
the costs integrating the OLH business units with its own will be CU 3 million.
Question 4.1: Complete the second column of the ff table by identifying which items
are recognized in applying the acquisition method under IFRS 3 and why (i.e., due to
satisfying the specified recognition criteria in IFRS 3).
Answer 4.1:
The following items (intangible assets, lease agreement and damages claim) are
analyzed to identify which of them are recognized in applying acquisition method
under IFRS 3:
a. CUSTOMER CONTRACTS
based on the information given, customer contracts are qualified to be an intangible
assets which are recognized separately from goodwill and measured reliably at fair
value. [IFRS 3 PAR. 14, B31 B33]
b. NON-CONTRACTUAL CUSTOMER RELATIONSHIPS
It is not included because there is no evidence of exchange transactions for the
similar non-contractual relationship. Thus, it does not meet the separable criterion
for it to be recognized under IFRS 3.
c. INTERNET DOMAIN NAMES
Meets the contractual-legal criterion for identification as an intangible asset and
eventually meets the separable criterion given that the fair value is reliably
measured.
d. BRAND NAME
Meets the contractual-legal criterion for identification as an intangible asset and
eventually meets the separable criterion given that the fair value is reliably
measured.
e. CUSTOMER DATABASE
Meets the contractual-legal criterion for identification as an intangible asset and
eventually meets the separable criterion given that the fair value is reliably
measured.
f. IN-PROCESS R&D
Meets the contractual-legal criterion for identification as an intangible asset and

eventually meets the separable criterion given that the fair value is reliably
measured.
g. LEASE AGREEMENT
The agreement is an operating lease and determined unfavorable relative to its
market terms. Therefore, it is recognized as a liability. . [IFRS 3 PAR. 14, B28 B29]
h. WEBSITE CONTRACT
Meets the contractual-legal criterion for identification as an intangible asset and
eventually meets the separable criterion given that the fair value is reliably
measured.
g. DAMAGES CLAIM
Contrary to IAS 37, the acquirer recognizes a contingent liability assumed in a
business combination at the acquisition date even if it is not probable that an
outflow of resources embodying economic benefits will be required to settle the
obligation. Thus, damages claim is recognized at acquisition date and its fair value
is measured reliably.

Question 4.2: Section 1.4 above raises the issue of restructuring provisions. Is ADC
able to recognize a restructuring provision under IFRS 3?
Answer:

Activity 5: Prepare fair value statement of financial position of the acquiree

Table 1: Recognize and measure the identifiable assets acquired, liabilities assumed
and non-controlling interest of the acquiree
On-Line Homes (OLH)

Book Value

Fair Value

Cash

10

10

Debtors, net

20

20

Mortgage loan receivables

55

47

PP&E

30

35

Intangible-software
Intangible- customer contracts

15

Intangible- internet domain

names
Intangible- brand name

2
20

Intangible- customer database

Intangible- In-process R&D

Intangible- website contract

TOTAL ASSETS

117

155

Deferred Tax

(30)

Payables

(10)

(30)

Provisions

(10)

(10)

Interest bearing liabilities

(50)

(15)

Liability operating lease

(3)

Contingent liabilities

TOTAL LIABILITIES
NET ASSETS

(50)

(67)

67

88

Activity 6: Accounting for tax effect

As a consequence of the recognizing and measuring the identifiable assets ,
liabilities assumed and non-controlling interests of the acquire, ADC must calculate
the tax effect of these adjustments in accordance with IAS 12 Income tax.
Therefore, complete the ff. table to calculate deferred tax balance. Applicable
income tax rate is 30%.
Table 1: Calculate Temporary Differences
On-Line Homes (OLH)

Fair Value

Tax Base

Cash

10

10

Temporary
Differences
-

Debtors, net

20

20

Mortgage loan receivables

47

55

PP&E

35

20

(15)

IPR&D

Intangible-software

(2)

Intangible- customer
contracts
Intangible- internet domain
names
Intangible- brand name

15

(15)

(2)

20

(20)

Intangible- customer
database
Intangible- website contract

(1)

(2)

Payables

(30)

(30)

Provisions

(10)

10

Interest bearing liabilities

(15)

(10)

Liability operating lease

(3)

97

67

(30)

Contingent liabilities
Fair Value of the
identifiable assets
acquired, liabilities
assumed, excluding
deferred tax
Table 2: Deferred tax balance
Temporary Differences
30

Applicable tax rate

30%

Deferred tax balance

9