Problem

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:

1- International Financial Reporting Standards setting out any impact that IFRS3 (Revised) ‘Business Combinations' and
2- IAS27 (Revised) ‘Consolidated and Separate Financial Statements' might have on the earnings and net assets of the group.