Question

QUESTION 14

1. Major buys 90% of Little, and has control. What amounts will be shown in the consolidated balance sheet at the acquisition date for Little’s assets and liabilities?

   	a.	100% of their book values
   	b.	100% of their fair values
   	c.	90% of the book value
   	d.	90% of the fair value

Answer 1

Answer:

Option B is the correct answer : 100% of their fair values

Detailed explanations for the answer

1. Measure Tangible Assets and Liabilities

When an acquirer buys another company  Measure tangible assets and liabilities at their fair market values as of the acquisition date, which is the date when the acquirer gains control over the acquiree. There are a few exceptions, such as lease and insurance contracts, which are measured as of their inception dates. However, most assets and liabilities should be measured as of the acquisition date. This fair value analysis is frequently done by a third-party valuation firm.

2. Measure Intangible Assets and Liabilities

Measure intangible assets and liabilities at their fair market values as of the acquisition date, which is the date when the acquirer gains control over the acquiree. This tends to be a more difficult task for the acquirer than the measurement of tangible assets and liabilities, since the acquiree may not have recorded many of these items on its balance sheet.

measurement under IFRS 3

IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business (e.g. an acquisition or merger). Such business combinations are accounted for using the 'acquisition method', which generally requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date.