The Allocation Model of Negative Fair Value of Assets at Initial Recognition of Business Combination under IFRS 3

This paper examines the issue of the initial measurement of assets in a business combination in accordance with IFRS 3. Accounting research focuses mainly on goodwill – its recognition, its treatment as an asset, its subsequent measurement, and the use of goodwill for earnings smoothing. However, they don’t address the allocation of assets measured at a negative fair value.

The fundamental models – the Individual Adjusting Factor Model and the Structural Factor Model – require the arbitrary assumption that the adjusting factors are equal to zero. Therefore, the motivation and aim of this paper was to develop alternative allocation models that would allow the measurement of the initial value of a company’s assets if some cash-generating units (CGUs) are measured at a negative fair value.

After conducting an extensive literature review, three alternative allocation models were developed. In the General Adjusting Factor Model, a general adjustment factor is assigned to total assets to reflect the total fair value of the cash-generating unit (CGU). In the Decreasing Adjusting Factor Model, each CGU is assigned and sorted in descending order by its fair value. In the Sum-of-Year-Digits Model, the total fair value of the enterprise’s assets is recognized in the initial values of the CGUs using the SYD method, where the share of the total positive fair value is based on the number of units.