Determining fair value of consideration in business combination

Determining fair value of consideration in...

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We are a listed entity and have recently acquired another business.

The consideration was largely shares, which we had to issue. We alloted these shares at the par value, however the share price on the date of acquisition (and for some time) has been well below par. This is where I am starting to get confused on the journal entries to account for this business combination.

IFRS 3 states that the cost of the acquisitiion should be the cash amount plus the fair value of any other consideration. Clearly the fair value of the shares is not the par value, but in fact the value as per the share price on date of sale. However I am unsure how the journal entries woudl work in this case, as the share capital account has to be credited for the full amount (number of shares at par value), and the remaining debit is not able to be debited to the share premium account under the Companies Act?. I have only recently moved to the UK so not 100% on these rules?

If I was to use the par value of the shares when determining the cost of the acquisition I would be over valuing the cost of the acquisition and thus also the amount of goodwill relating to the transaction.

Greatly appreciated if anyone has dealt with this before or has any thought which might be of assistance.

Thanks

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By compliant
29th Jul 2012 13:41

Determining fair value of consideration in business combination

I believe that the adjustment down from par to fair value will need to go to retained earnings. Not certain though but will do a bit of research

 

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