2 Marrgrett, a public limited company, is currently planning to acquire and sell interests in other entities and has asked

for advice on the impact of IFRS3 (Revised) ‘Business Combinations’ and IAS27 (Revised) ‘Consolidated and Separate

Financial Statements’. The company is particularly concerned about the impact on earnings, net assets and goodwill

at the acquisition date and any ongoing earnings impact that the new standards may have.

The company is considering purchasing additional shares in an associate, Josey, a public limited company. The

holding will increase from 30% stake to 70% stake by offering the shareholders of Josey, cash and shares in

Marrgrett. Marrgrett anticipates that it will pay $5 million in transaction costs to lawyers and bankers. Josey had

previously been the subject of a management buyout. In order that the current management shareholders may remain

in the business, Marrgrett is going to offer them share options in Josey subject to them remaining in employment for

two years after the acquisition. Additionally, Marrgrett will offer the same shareholders, shares in the holding company

which are contingent upon a certain level of profitability being achieved by Josey. Each shareholder will receive shares

of the holding company up to a value of $50,000, if Josey achieves a pre-determined rate of return on capital

employed for the next two years.

Josey has several marketing-related intangible assets that are used primarily in marketing or promotion of its products.

These include trade names, internet domain names and non-competition agreements. These are not currently

recognised in Josey’s financial statements.

Marrgrett does not wish to measure the non-controlling interest in subsidiaries on the basis of the proportionate

interest in the identifiable net assets, but wishes to use the ‘full goodwill’ method on the transaction. Marrgrett is

unsure as to whether this method is mandatory, or what the effects are of recognising ‘full goodwill’. Additionally the

company is unsure as to whether the nature of the consideration would affect the calculation of goodwill.

To finance the acquisition of Josey, Marrgrett intends to dispose of a partial interest in two subsidiaries. Marrgrett will

retain control of the first subsidiary but will sell the controlling interest in the second subsidiary which will become

an associate. Because of its plans to change the overall structure of the business, Marrgrett wishes to recognise a

re-organisation provision at the date of the business combination.

Required:

Discuss the principles and the nature of the accounting treatment of the above plans under International Financial

Reporting Standards setting out any impact that IFRS3 (Revised) ‘Business Combinations’ and IAS27 (Revised)

‘Consolidated and Separate Financial Statements’ might have on the earnings and net assets of the group.

Note: this requirement includes 2 professional marks for the quality of the discussion.

(25 marks)