IFRS 9 Financial Instruments
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for Accounting Professionals
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IFRS 3 - Business Combinations
2013
IFRS WORKBOOKS
(1 million downloaded)
Welcome to the EU Tacis IFRS Workbooks sixth (2013) edition! This is the tenth anniversary of the first edition in 2003. The changes from the 2012 edition are minimal, with no new standard issued in the past year. Major changes are anticipated to IFRS 9, IFRS 4, IAS 17 and IAS 18. Exposure drafts (proposals) have been issued, but have not yet been incorporated into the standards. To the books, we have added an article: ‘IFRS- grabbing the tiger by the tail’ which has been published by bankir.ru in Russian. This article covers IFRS teaching issues for each standard and a number of opinions and discussion points.
The set of books provides a book for every standard, plus three books on consolidation. Financial instrument bookkeeping is covered in IAS 32/39 (book 3) and in IFRS 9. IFRS 7 is complemented by FINREP, which illustrates practical use and presentation formats. An introduction to IFRS and transformation models from Russian accounting to IFRS complete the set.
Each workbook is a combination of Information, Examples, Self-Test Questions and Answers.
Thanks are due to those who made these publications possible and to you, our readers, for your continued support. I would like to express my gratitude to: Igor Sykharev and Tatiana Trifonova of the Ministry of Finance who provided a link from the Ministry’s site. Gulnara Makhmutova and Adel Valeev provided the updated Russian texts and editing. Marina Korf and Yulia Ykhanova of bankir.ru provided help, advice and space on its website. Sergey Dorozhkov and Elina Buzina of Association of Russian Bankers’ Institute of Banking ran excellent IFRS courses on all standards which enabled us to test this material and learn new insights from them and the participants. Please join us there for the best consolidation course in Russia.
World Bank courses for the Bank of Tanzania (‘BOT’) provided new IFRS and banking insights: thanks to Albert Mkenda BOT and my colleague Benson Mahenya among many others. IFRS assistance to the Bank of Mongolia (‘BOM’) with PricewaterhouseCoopers (thanks to Ekaterina Nekrasova, Jelena Pesic and Vladislav Kononenko) provided exposure to Mongolian commercial bank reporting and blending IFRS with bank prudential ratios. Oyungerel Gonchig, Project Manager at World Bank, Mongolia, and our counterparts at BOM: Oyuntsatsral Banid, Bunchinsuren Dagva, Borkhuu Gotovsuren, Batmaa Ochirbat and Gantsetseg Myagmarjay contributed to a memorable project.
On the back page are notes covering copyright details and the history of the series.
Please tell your friends and colleagues where to find our books. We hope that you find them useful.
Robin Joyce
Professor of the Chair of International Banking and Finance,
Financial University under the Government of the Russian Federation
Professor, Russian Academy of National Economy and Public
Administration under the President of the Russian Federation
Visiting Professor of the Siberian Academy of Finance and Banking Moscow, Russia 2013
CONTENTS
1. Business Combinations - Introduction 4
2. DEFINITIONS 8
3. Identifying a business combination 31
4. Method of Accounting 32
5. Allocating the cost of a combination 34
6. Intangible assets 35
7. Goodwill 37
8. Provisional Accounting 39
9. Reverse acquisitions 42
10. PRACTICAL ISSUES 45
11. Combinations involving undertakings under common control outside the scope of IFRS 3 46
12. MULTICHOICE QUESTIONS 46
13. Answers to multiple choice questions 51
Business Combinations - Introduction
OVERVIEW
Aim
The aim of this workbook is to assist the individual in understanding the
IFRS 3 treatment of Business Combinations. This workbook includes the 2008 revisions.
|The main revisions made in 2008 were: |
| |
|• The scope was broadened to cover business combinations involving only mutual undertakings and business |
|combinations achieved by contract alone. |
| |
|• The definitions of a business and a business combination were amended and additional guidance was added |
|for identifying when a group of assets constitutes a business. |
| |
|• For each business combination, the acquirer must measure any non-controlling interest (NCI) in the |
|acquiree either at fair value or as the non-controlling interest’s proportionate share of the acquiree’s |
|net identifiable assets. Previously, only the latter was permitted. |
| |
|Using fair value involves the NCI having its own goodwill, being the difference between applying the two |
|methods. All goodwill is tested for impairment. |
| |
|• The requirements for how the acquirer makes any classifications, designations or assessments for the |
|identifiable assets acquired and liabilities assumed in a business combination were clarified. |
| |
|• The period during which changes to deferred tax benefits acquired in a business combination can be |
|adjusted against goodwill has been limited to the measurement period (through a consequential amendment to|
|IAS 12 Income Taxes). |
| |
|• An acquirer is no longer permitted to recognise contingencies acquired in a business combination that do|
|not meet the definition of a liability. |
| |
|• Costs the acquirer incurs in connection with the business combination must be accounted for separately |
|from the business combination, which usually means that they are recognised as expenses (rather than |
|included in goodwill). |
| |
|• Consideration transferred by the acquirer, including contingent consideration, must be measured and |
|recognised at fair value at the acquisition date. |
| |
|Subsequent changes in the fair value of contingent consideration classified as liabilities are recognised |
|in accordance with IAS 39, IAS 37 or other IFRSs, as appropriate (rather than by adjusting goodwill). The |
|disclosures required to be made in relation to contingent consideration were enhanced. |
| |
|• Application guidance was added in relation to when the acquirer is obliged to replace the acquiree’s |
|share-based payment awards; measuring indemnification assets; rights sold previously that are reacquired |
|in a business combination; operating leases; and valuation allowances related to financial assets such as |
|receivables and loans. |
| |
|• For business combinations achieved in stages, having the acquisition date as the single measurement date|
|was extended to include the measurement of goodwill. |
| |
|An acquirer must remeasure any equity interest it holds in the acquiree immediately before achieving |
|control at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or |
|loss. |
The standard now applies to more transactions, as combinations by contract alone and combinations of mutual undertakings are brought into the scope of the standard.
This change in scope is not significant for many undertakings. High-profile combinations of mutual undertakings are uncommon, and combinations by contract (staplings) occur in Australia but are rarely seen elsewhere.
Common control transactions and the formation of joint ventures remain outside the scope of the standard.
The definition of a business has been amended slightly. It now states that the elements are ‘capable of being conducted’ rather than ‘are conducted and managed’ to generate a return.
Accounting
Business combinations within the scope of IFRS 3 are accounted for using the ‘acquisition method’.
The acquirer records the acquiree’s identifiable assets, liabilities and contingent liabilities at their fair values at the acquisition date and also records goodwill, which is subsequently tested for impairment.
Assets acquired and assumed
i) Recognition
If there is an existing restructuring liability per IAS37 it is included in the goodwill calculation.
If fair values can be measured reliably, the acquirer must record separately the acquiree’s contingent liabilities at the acquisition date, as part of allocating the cost of a business combination. If the contingent liabilities cannot be measured, they are not included in the allocation of cost.
ii) Measurement
IFRS 3 requires the acquiree’s identifiable assets, liabilities and contingent liabilities to be measured initially at their fair values, at the acquisition date.
Any non-controlling (minority interest) in the acquiree is the minority’s proportion of the net fair values.
Goodwill
IFRS 3 requires goodwill to be measured after initial recognition at cost, less any accumulated impairment losses.
Goodwill is not amortised but must be tested for impairment annually, or more frequently if there are indications of impairment.
Negative goodwill
IFRS 3 requires that negative goodwill must be credited by the acquirer immediately to the income statement.
The acquirer records the acquiree’s identifiable assets, liabilities and contingent liabilities at their fair values at the acquisition date and also records goodwill, which is subsequently tested for impairment.
Main features of IFRS 3
The objective of IFRS 3 is to improve the relevance, reliability and comparability of the information that an undertaking provides in its financial statements about a business combination and its effects.
It does that by establishing principles and requirements for how an acquirer:
(i) recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;
(ii) recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
(iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
Core principle
An acquirer of a business recognises the assets acquired and liabilities assumed at their acquisition-date fair values and discloses information that enables users to evaluate the nature and financial effects of the acquisition.
Applying the acquisition method
A business combination must be accounted for by applying the acquisition method, unless it is a combination between undertakings, or businesses, under common control.
One of the parties to a business combination can always be identified as the acquirer, being the undertaking that obtains control of the other business (the acquiree).
Formations of a joint venture, or the acquisition of an asset or a group of assets that does not constitute a business, are not business combinations.
IFRS 3 establishes principles for recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest (previously called Minority Interests) in the acquiree.
Any classifications or designations made in recognising these items must be made in accordance with the contractual terms, economic conditions, acquirer’s operating or accounting policies and other factors that exist at the acquisition date.
Each identifiable asset and liability is measured at its acquisition-date fair value. Any non-controlling interest in an acquiree is measured at fair value or as the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets.
IFRS 3 provides limited exceptions to these recognition and measurement principles:
(i) Leases and insurance contracts are required to be classified on the basis of the contractual terms and other factors at the inception of the contract (or when the terms have changed) rather than on the basis of the factors that exist at the acquisition date.
(ii) Only those contingent liabilities assumed in a business combination that are a present obligation and can be measured reliably are recognised.
(iii) Some assets and liabilities are required to be recognised or measured in accordance with other IFRSs, rather than at fair value.
The assets and liabilities affected are those falling within the scope of IAS 12, IAS 19, IFRS 2 and IFRS 5.
(iv) There are special requirements for measuring a reacquired right.
(v) Indemnification assets are recognised and measured on a basis that is consistent with the item that is subject to the indemnification, even if that measure is not fair value.
IFRS 3 requires the acquirer, having recognised the identifiable assets, the liabilities and any non-controlling interests (previously called Minority Interests), to identify any difference between:
(i) the aggregate of the consideration transferred, and
(ii) the net identifiable assets acquired.
The difference will, generally, be recognised as goodwill. If the acquirer has made a gain from a bargain purchase (paid less than the value of net assets) that gain is recognised in profit or loss.
The consideration transferred in a business combination (including any contingent consideration) is measured at fair value.
In general, an acquirer measures and accounts for assets acquired and liabilities assumed or incurred in a business combination after the business combination has been completed in accordance with other applicable IFRSs.
However, IFRS 3 provides accounting requirements for reacquired rights, contingent liabilities, contingent consideration and indemnification assets.
Disclosure
IFRS 3 requires the acquirer to disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combinations that occurred during the current reporting period or after the reporting date, but before the financial statements are authorised for issue.
After a business combination, the acquirer must disclose any adjustments recognised in the current reporting period that relate to business combinations that occurred in the current, or previous, reporting periods.
|2. DEFINITIONS |
|acquiree |The business or businesses that the acquirer obtains control of in a |
| |business combination. |
|acquirer |The undertaking that obtains control of the acquiree. |
|acquisition date |The date on which the acquirer effectively obtains control of the |
| |acquiree. |
|agreement date |The date that an agreement between the combining parties is reached. |
| | |
| |In the case of publicly listed undertakings, the date that is |
| |announced to the public. |
| | |
| |In the case of a hostile takeover, the earliest date that an |
| |agreement between the combining parties is reached. This is the date |
| |that a sufficient number of the acquiree’s owners have accepted the |
| |acquirer’s offer, for the acquirer to obtain control of the acquiree.|
|business |An integrated set of activities and assets, conducted and managed, |
| |for the purpose of providing: |
| | |
| |i a return to investors; or |
| | |
| |ii lower costs or other benefits directly and proportionately to |
| |participants. This relates to mutual undertakings. |
| | |
| |A business generally consists of inputs, processes and resulting |
| |outputs that are used to generate revenues. If goodwill is present, |
| |an organisation is presumed to be a business. |
|business combination |The bringing together of separate businesses into one reporting |
| |undertaking. Transactions sometimes referred to as ‘true mergers’ or |
| |‘mergers of equals’ are also business combinations as that term is |
| |used in IFRS 3. |
|business combination involving |A business combination in which all of the combining businesses |
|businesses under common control |ultimately are controlled by the same party or parties, both before |
| |and after the combination and that control is not transitory. |
| | |
|contingent |Usually, an obligation of the acquirer to transfer additional assets |
|consideration |or equity interests to the former owners of an acquiree as part of |
| |the exchange for control of the acquiree if specified future events |
| |occur or conditions are met. |
| | |
| |However, contingent consideration also may give the acquirer the |
| |right to the return of previously transferred consideration if |
| |specified conditions are met. |
|contingent liability |Contingent liability has the meaning given to it in IAS 37 |
| |Provisions: |
| | |
| |a possible obligation that arises from past events and whose |
| |existence will be confirmed only by the occurrence or non-occurrence |
| | |
| |of one or more uncertain future events, not wholly within the control|
| |of the undertaking; or |
| | |
| |a present obligation that arises from past events, but is not |
| |recorded because: |
| | |
| |i it is not probable that payment will be required to settle the |
| |obligation; or |
| | |
| |ii the amount of the obligation cannot be measured with sufficient |
| |reliability. |
|control |The power to govern the financial and operating policies of a |
| |business. |
|date of exchange |When a business combination is achieved in a single exchange |
| |transaction, the date of exchange is the acquisition date. |
| | |
| |When a business combination involves more than one exchange |
| |transaction for example when it is achieved in stages by successive |
| |share purchases, the date of exchange is the date that each |
| |individual investment is recorded in the financial statements of the |
| |acquirer. |
|equity interests |Equity interests is used broadly to mean ownership interests of |
| |investor-owned undertakings and owner, member or participant |
| |interests of mutual undertakings. |
| | |
| | |
|fair value |The price that would be received to sell an asset, or paid to |
| |transfer a liability, in an orderly transaction between market |
| |participants at the measurement date. (IFRS 13) |
|goodwill |Benefits arising from assets that are not capable of being |
| |individually identified and separately recorded. |
|identifiable |An asset is identifiable if it either: |
| | |
| |(a) is separable, ie capable of being separated or |
| |divided from the undertaking and sold, transferred, |
| |licensed, rented or exchanged, either individually |
| |or together with a related contract, identifiable |
| |asset or liability, regardless of whether the undertaking |
| |intends to do so; or |
| | |
| |(b) arises from contractual or other legal rights, |
| |regardless of whether those rights are transferable |
| |or separable from the undertaking or from other rights |
| |and obligations. |
|intangible asset |Intangible asset has the meaning given to it in IAS 38: an |
| |identifiable non-monetary asset without physical substance. |
|joint venture |Joint venture has the meaning given to it in IFRS 11: a contractual |
| |arrangement, whereby parties undertake an activity, that is subject |
| |to joint control. |
|minority interest / |That portion of the income statement and net assets of a subsidiary |
|non-controlling |attributable to shares that are not owned directly, or indirectly, by|
|interest |the parent. |
|mutual undertaking |An undertaking other than an investor-owned undertaking, such as a |
| |mutual insurance company, or a mutual cooperative undertaking, that |
| |provides lower costs, or other economic benefits, directly and |
| |proportionately to its participants. |
| | |
| |For example, a mutual insurance company, a credit |
| |union and a co-operative undertaking are all mutual undertakings. |
|owners |Owners is used broadly to include holders of equity interests of |
| |investor-owned undertakings and owners or members of, or participants|
| |in, mutual undertakings. |
|parent |An undertaking that has one, or more, subsidiaries. |
|probable |More likely than not. |
|reporting undertaking |An undertaking for which there are users who rely on the |
| |undertaking’s financial statements for information, which will be |
| |useful to them for making decisions about the allocation of |
| |resources. |
| | |
| |A reporting undertaking can be a single undertaking, or a group. |
|subsidiary |An undertaking including an unincorporated undertaking such as a |
| |partnership, which is controlled by the parent. |
Scope
IFRS 3 applies to a transaction or other event that meets the definition
of a business combination.
IFRS 3 does not apply to:
(i) the formation of a joint venture (see IFRS 11 workbook).
(ii) the acquisition of an asset or a group of assets that does not constitute a business.
In such cases the acquirer shall identify and recognise the individual, identifiable assets acquired (including those assets that meet the definition of, and recognition criteria for, intangible assets-see IAS 38) and liabilities assumed.
The cost of the group shall be allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase.
Such a transaction or event does not give rise to goodwill.
In the following examples, I/B refers to Income Statement and Balance Sheet (SFP).
|EXAMPLE-Buying assets |
|You pay $5m to buy assets worth $3m from a firm that is being liquidated. |
|The additional $2m premium is called goodwill. The $2m should be reviewed |
|(why and for what did you pay the premium?) and intangible assets created according to IAS 38 rather than |
|goodwill. This is not a combination and should be treated as a purchase of assets. The cost will be |
|allocated to the assets purchased, based on their fair values. |
| |I/B |DR |CR |
|Assets various |B |$3m | |
|Cash |B | |$5m |
|Intangible assets |B |$2m | |
|Purchase of assets | | | |
(iii) a combination between undertakings or businesses under common control.
Identifying a business combination
An undertaking shall determine whether a transaction, or other event, is a business combination by applying the definition in IFRS 3, which requires that the assets acquired and liabilities assumed constitute a business.
(The definition of a business has been amended slightly in 2008. It now states that the elements are ‘capable of being conducted’ rather than ‘are conducted and managed’ to generate a return.)
If the assets acquired are not a business, the reporting undertaking shall account for the transaction or other event as an asset acquisition.
EXAMPLE-Buying assets
You buy some assets, including lists of clients, from a firm that is being liquidated. This is not a combination and should be treated as a purchase of assets. The cost will be allocated to the assets purchased, based on their fair values.
The acquisition method
An undertaking shall account for each business combination by applying the acquisition method.
Applying the acquisition method requires:
(i) identifying the acquirer;
(ii) determining the acquisition date;
(iii) recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; and
(iv) recording and measuring goodwill, or a gain from a bargain purchase (negative goodwill).
A combination may be structured in a variety of ways for legal, taxation, or other reasons. It may involve
i) purchase of the equity of another undertaking,
ii) purchase of all the net assets of another undertaking,
iii) assumption of the liabilities of another undertaking, or
iv) purchase of some of the net assets of another undertaking, that together form one or more businesses.
It may be effected by the issue of shares, the transfer of cash, cash equivalents or other assets, or a combination thereof.
|EXAMPLE-Buying a business using cash and shares |
|You buy 100% of a business for $10m. You pay $4m in cash and issue $6m of equity to finance the purchase. |
| |I/B |DR |CR |
|Investment in subsidiary |B |$10m | |
|Cash |B | |$4m |
|Share capital |B | |$6m |
|Purchase of business | | | |
The transaction may be between the shareholders of the combining undertakings, or between one undertaking and the shareholders of another undertaking.
It may involve the establishment of a new undertaking to control the combining undertakings or net assets transferred, or the restructuring of one or more of the combining undertakings.
EXAMPLES-Methods of purchase
1. Your shareholders and the shareholders of another company merge your companies by issuing shares in a new company that will encompass both companies.
2. Your company pays cash to the shareholders of another company to buy their business.
A business combination may result in a parent-subsidiary relationship in which the acquirer is the parent and the acquiree its subsidiary.
In such circumstances, the acquirer applies IFRS 3 in its consolidated financial statements.
EXAMPLE-Buying a business - parent-subsidiary relationship
Your company the acquirer buys 100% of another company the acquiree.
Your company is the parent. The acquiree is the subsidiary.
It includes its interest in the acquiree, in any separate financial statements, as an investment in a subsidiary: see IAS 27.
A combination may involve the purchase of the net assets, including any goodwill, rather than the purchase of the equity. Such a combination does not result in a parent-subsidiary relationship.
Control
Control is the power to govern the financial and operating policies of an undertaking. If you control another business, by whatever means, it should be consolidated. You know whether or not you have control of another business.
An undertaking is presumed to have obtained control of another undertaking when it acquires more than one-half of that other undertaking’s voting rights, unless it can be demonstrated that such ownership does not constitute control.
EXAMPLES- Control
1. You buy 60% of a company. This entitles you to 60% of the votes at shareholders meetings. You have control, even though the other 40% of the votes are in the hands of others.
2. You own 100% of a firm in the defence industry. The government appoints the directors of this firm. You do not have control, as the government-appointed directors may not follow your policies.
Even without one-half of the voting rights control may be obtained in other ways.
i power over more than one-half of the voting rights of the other undertaking, by virtue of an agreement with other investors; or
|EXAMPLE- Control by agreement |
|You buy 40% of the voting shares in a foreign company. Other investors, representing 35% of the company|
|wish you to manage their investment and sign an agreement that gives you their votes in all matters |
|relating to the company. You have control of the company. |
ii power to govern the financial and operating policies of the other undertaking under a statute, or an agreement; or
EXAMPLE- Control by statute
Your firm is providing electricity. The government controls all sales tariffs and your purchase prices. The government has control of your financial policies, so has control of the firm.
iii power to appoint or remove the majority of the members of the board of directors or equivalent of the other undertaking; or
EXAMPLE- Control of board appointments
You own 100% of a firm in the defence industry. The government appoints the directors of this firm. You do not have control, as the government-appointed directors may not follow your policies.
iv power to cast the majority of votes at meetings of the board of directors or equivalent of the other undertaking.
EXAMPLE- Control of votes
You buy 20% of the shares of a company. The capital structure of the company entitles you to 60% of the votes at shareholders meetings. You have control, even though the other 80% of the shares are in the hands of others.
Identifying the acquirer
For each business combination, one of the combining undertakings shall be identified as the acquirer see IFRS 10—the undertaking that obtains control of the acquiree.
Although sometimes it may be difficult to identify an acquirer, there are usually indications that one exists. For example:
i if the fair value of one of the undertakings is greater than that of the other, the greater is likely to be the acquirer;
EXAMPLE- Acquirer – the larger undertaking
Your firm has a market value of $100m. You merge with another firm with a market value of $5m. As your firm is larger, it will be the acquirer.
ii if the combination is effected through an exchange of voting ordinary shares for cash or other assets, the undertaking giving up cash or other assets is likely to be the acquirer; and
|EXAMPLE- Acquirer –Issuing shares |
|Your firm merges with another. Your firm pays $50m for the shares of the other firm. Your firm is the |
|acquirer. |
| |I/B |DR |CR |
|Investment in subsidiary |B |$50m | |
|Share capital |B | |$50m |
|Purchase of business- Issuing shares | | | |
iii if the combination results in the management of one of the undertakings being able to run the combined undertaking, the dominant management is likely to be the acquirer.
EXAMPLE- Acquirer – management control
Your firm has a market value of $100m. You merge with another firm with a market value of $120m. Your directors and management will run the combination. As your firm has management control, your firm will be the acquirer.
In a combination effected through an exchange of shares, the undertaking that issues the shares is normally the acquirer.
In ‘reverse acquisitions’, the acquirer ‘s shares are acquired.
EXAMPLE- Reverse acquisition
A private undertaking arranges to have itself ‘acquired’ by a smaller public undertaking, as a means of obtaining a stock exchange listing.
‘Small’, a listed company, buys ‘Big’ a private company, in a reverse acquisition. Big wants to become a quoted group, and this method is used.
The shareholders of Big buy the shares of Small. Big’s directors take control of Small. Small then buys Big, in exchange for shares.
Small is the legal parent, but Big is the acquirer as it dictates the financial and operating policies of Small.
The allocation of the cost of the combination and the calculation of goodwill, is based on the net assets of Small.
Big’s assets are not revalued to fair value but Small’s are to establish the cost of combination and goodwill.
The power to govern the financial and operating policies defines the acquirer.
When a new undertaking is formed to issue shares to effect a combination, one of the undertakings that existed before the combination must be identified as the acquirer, on the basis of the evidence available.
EXAMPLE – New company formed for combination
Natasha and Alexandra companies merge. Their net assets are transferred into a new company, Gemini and the original companies liquidated.
Either Natasha or Alexandra will be identified as the acquirer, based on the tests described above. Even though the two companies have been liquidated, one must be identified as the acquirer for accounting purposes.
Similarly, when a combination involves more than two undertakings, one that existed before the combination must be identified as the acquirer on the basis of the evidence available.
Determining the acquirer in such cases must include consideration of which of the undertakings initiated the combination, and whether the assets or revenues of one of the undertakings exceed those of the others.
EXAMPLE- Initiator
Your company makes a bid for another listed company. The merger is agreed.
Following tax advice, the other company buys the shares of your company and becomes the legal parent. Nonetheless, your company is the acquirer, as you initiated the combination.
Determining the acquisition date
The acquirer shall identify the acquisition date, which is the date on which it obtains control of the acquiree.
The date on which the acquirer obtains control of the acquiree is generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the acquiree—the closing date.
However, the acquirer might obtain control on a date that is either earlier, or later, than the closing date.
For example, the acquisition date precedes the closing date if a written agreement provides that the acquirer obtains control of the acquiree on a date before the closing date.
Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree
Recognition principle
As of the acquisition date, the acquirer shall recognise, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree.
Recognition conditions
To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities in the IFRS Framework at the acquisition date.
For example, costs the acquirer expects, but is not obliged to incur ,in the future to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree’s employees are not liabilities at the acquisition date.
Therefore, the acquirer does not recognise those costs as part of applying the acquisition method. Instead, the acquirer recognises those costs in its post-combination financial statements in accordance with other IFRSs.
In addition, to qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must be part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination transaction rather than the result of separate transactions (discussed later) .
The acquirer’s application of the recognition principle and conditions may result in recognising some assets and liabilities that the acquiree had not previously recognised as assets and liabilities in its financial statements.
For example, the acquirer recognises the acquired identifiable intangible assets, such as a brand name, a patent or a customer relationship, that the acquiree did not recognise as assets in its financial statements because it developed them internally and charged the related costs to expense.
Classifying or designating identifiable assets acquired and
liabilities assumed in a business combination
At the acquisition date, the acquirer shall classify, or designate, the identifiable assets acquired and liabilities assumed as necessary to apply other IFRSs subsequently.
The acquirer shall make those classifications, or designations, on the basis of the contractual terms, economic conditions, its operating or accounting policies and other pertinent conditions as they exist at the acquisition date.
In some situations, IFRSs provide for different accounting depending on how an undertaking classifies, or designates, a particular asset or liability.
Examples of classifications or designations that the acquirer shall make on the basis of the pertinent conditions as they exist at the acquisition date include but are not limited to:
(i) classification of particular financial assets and liabilities as a financial asset or liability at fair value through profit or loss, , in accordance with IFRS 9 Financial Instruments;
(ii) designation of a derivative instrument as a hedging instrument in accordance with IAS 39; and
(iii) assessment of whether an embedded derivative should be separated from the host contract in accordance with IFRS 9.
For the classification of
(i) a lease contract as either an operating lease or a finance lease in accordance with IAS 17 Leases; and
(ii) a contract as an insurance contract in accordance with IFRS 4 Insurance Contracts,
the acquirer shall classify those contracts on the basis of the contractual terms and other factors at the inception of the contract (or the date of modification of terms).
Measurement principle
The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values.
For each business combination, the acquirer shall measure any non-controlling interest (previously called Minority Interests) in the acquiree either at fair value, or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.
Exceptions to the recognition or measurement principles
IFRS 3 provides limited exceptions to its recognition and measurement principles.
Exception to the recognition principle
Contingent liabilities
IAS 37 defines a contingent liability as:
(i) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the undertaking; or
(ii) a present obligation that arises from past events but is not recognised because:
(1) it is not probable that an outflow of resources embodying benefits will be required to settle the obligation; or
(2) the amount of the obligation cannot be measured with sufficient reliability.
The requirements in IAS 37 do not apply in determining which contingent liabilities to recognise as of the acquisition date.
Instead, the acquirer shall recognise as of the acquisition date a contingent liability assumed in a business combination if it is a present obligation that arises from past events and its fair value can be measured reliably.
Therefore, contrary to IAS 37, the acquirer recognises a contingent liability assumed in a business combination at the acquisition date, even if it is not probable that an outflow of resources will be required to settle the obligation.
The fair value will reflect the likelihood of payment of the contingent liability.
Exceptions to both the recognition and measurement principles
Income taxes
The acquirer shall recognise and measure a deferred tax asset or liability arising from the assets acquired and liabilities assumed in a business combination in accordance with IAS 12.
The acquirer shall account for the potential tax effects of temporary differences and carryforwards of an acquiree that exist at the acquisition date, or arise as a result of the acquisition in accordance with IAS 12.
Staff benefits
The acquirer shall recognise and measure a liability (or asset, if any) related to the acquiree’s staff benefit arrangements in accordance with IAS 19.
Indemnification assets
The seller in a business combination may contractually indemnify the acquirer for the outcome of a contingency, or uncertainty, related to all, or part, of a specific asset or liability.
For example, the seller may indemnify the acquirer against losses above a specified amount on a liability arising from a particular contingency; in other words, the seller will guarantee that the acquirer’s liability will not exceed a specified amount. Alternatively, the seller may indemnify the buyer against the outcome of a lawsuit, or tax ruling, that is pending at the time of the sale.
As a result, the acquirer obtains an indemnification asset. The acquirer shall record an indemnification asset at the same time that it recognises the indemnified item measured on the same basis as the indemnified item, subject to the need for a valuation allowance for uncollectible amounts.
Therefore, if the indemnification relates to an asset or a liability that is recognised at the acquisition date and measured at its acquisition-date fair value, the acquirer shall recognise the indemnification asset at the acquisition date measured at its acquisition-date fair value.
For an indemnification asset measured at fair value, the effects of uncertainty about future cash flows because of collectibility considerations are included in the fair value measure and a separate valuation allowance is not necessary.
In some circumstances, the indemnification may relate to an asset or a liability that is an exception to the recognition or measurement principles.
For example, an indemnification may relate to a contingent liability that is not recognised at the acquisition date because its fair value is not reliably measurable at that date.
Alternatively, an indemnification may relate to an asset or a liability, for example, one that results from a staff benefit, that is measured on a basis other than acquisition-date fair value.
In those circumstances, the indemnification asset shall be recognised and measured using assumptions consistent with those used to measure the indemnified item, subject to management’s assessment of the collectibility of the indemnification asset and any contractual limitations on the indemnified amount.
Exceptions to the measurement principle
Reacquired rights
The acquirer shall measure the value of a reacquired right recognised as an intangible asset on the basis of the remaining contractual term of the related contract regardless of whether market participants would consider potential contractual renewals in determining its fair value.
Share-based payment awards
The acquirer shall measure a liability or an equity instrument related to the replacement of an acquiree’s share-based payment awards with share-based payment awards of the acquirer in accordance with the method in IFRS 2. (IFRS 3 refers to the result of that method as the ‘market-based measure’ of the award.)
Assets held for sale
The acquirer shall measure an acquired non-current asset (or disposal group) that is classified as held for sale at the acquisition date in accordance with IFRS 5 at fair value less costs to sell.
Recognising and measuring goodwill or a gain from a bargain purchase
The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b) below:
(a) the aggregate of:
(i) the cost, which generally requires acquisition-date fair value;
(ii) the amount of any non-controlling interest (previously called Minority Interests) in the acquiree; and
(iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
In a business combination in which the acquirer and the acquiree (or its former owners) exchange only equity interests, the acquisition-date fair value of the acquiree’s equity interests may be more reliably measurable than the acquisition-date fair value of the acquirer’s equity interests.
If so, the acquirer shall determine the amount of goodwill by using the acquisition-date fair value of the acquiree’s equity interests instead of the acquisition-date fair value of the equity interests transferred.
To determine the amount of goodwill in a business combination in which no consideration is transferred, the acquirer shall use the acquisition-date fair value of the acquirer’s interest in the acquiree determined using a valuation technique in place of the acquisition-date fair value of the consideration transferred.
Bargain purchases (negative goodwill)
Occasionally, an acquirer will make a bargain purchase, paying less than the value of the net assets of the acquiree. In such a case, the acquirer shall recognise the resulting gain (negative goodwill) in profit or loss on the acquisition date.
The gain shall be attributed to the acquirer.
A bargain purchase might happen, for example, in a business combination that is a forced sale, in which the seller is acting under compulsion.
However, the recognition or measurement exceptions for particular items may also result in recognising a gain (or change the amount of a recognised gain) on a bargain purchase.
Before recognising a gain on a bargain purchase, the acquirer shall reassess whether it has correctly identified all of the assets acquired and all of the liabilities assumed and shall recognise any additional assets or liabilities that are identified in that review.
The acquirer shall then review the procedures used to measure the amounts IFRS 3 requires to be recognised at the acquisition date for all of the following:
(i) the identifiable assets acquired and liabilities assumed;
(ii) the non-controlling interest in the acquiree, if any;
(iii) for a business combination achieved in stages, the acquirer’s previously-held equity interest in the acquiree; and
(iv) the consideration transferred.
The objective of the review is to ensure that the measurements appropriately reflect consideration of all available information as of the acquisition date.
Cost of the acquisition
The cost of the acquisition shall be measured at fair value, which shall be calculated as the total amount paid by the acquirer including taking on liabilities incurred by the acquiree and equity interests issued by the acquirer.
Examples of potential forms of consideration include cash, other assets, a business or a subsidiary of the acquirer, contingent consideration, ordinary or preference equity instruments, options, warrants and member interests of mutual undertakings.
The consideration transferred may include assets or liabilities of the acquirer that have carrying amounts that differ from their fair values at the acquisition date (for example, non-monetary assets – such as land and buildings-, or a business of the acquirer).
If so, the acquirer shall remeasure the transferred assets or liabilities to their fair values as of the acquisition date and recognise the resulting gains or losses, if any, in profit or loss.
Assets or liabilities transferred into the acquiree remain within the combined undertaking after the business combination, and the acquirer therefore retains control of them.
In that situation, the acquirer shall measure those assets and liabilities at their carrying amounts immediately before the acquisition date and shall not record a gain or loss in profit or loss on assets or liabilities it controls both before and after the business combination.
The acquirer must measure the cost of a combination as the aggregate of the fair values at the date of exchange of net assets given in exchange for control of the acquiree. Transaction costs are expensed.
In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss. In prior reporting periods, the acquirer may have recognised changes in the value of its equity interest in the acquiree in other comprehensive income (for example, because the investment was classified as available for sale).
If so, the amount that was recognised in other comprehensive income shall be recognised on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest.
EXAMPLE-combination in stages of successive share purchases
On 1st January, you agree to buy a company. You will buy 20% of the shares on January 1st, another 50% on March 1st and the final 30% on June 1st.
You will pay a total of $200m for all the shares. This is the cost of the combination.
The dates of exchange are January 1st, March 1st and June 1st.
The acquisition date is March 1st, as that is when you acquired voting control of the company.
Assets and liabilities in exchange for control of the acquiree must be measured at their fair values at the date of exchange.
If settlement of any part of the cost of a combination is deferred, the fair value of the part is determined by discounting the costs to their present value.
This is at the date of exchange including any premium or discount, incurred in settlement.
The published price at the date of exchange of a quoted equity instrument provides the best evidence of the instrument’s fair value and must be used.
|EXAMPLE – Fair value- share price on the date of exchange |
|You offer 1million of your shares for a company. You offer is accepted. |
|At the date of exchange, your shares are quoted at $33 per share. Their par value is $10, so $23 (33-10) |
|is treated as share premium. |
| |I/B |DR |CR |
|Investment in subsidiary |B |$33m | |
|Share capital |B | |$10m |
|Share premium |B | |$23m |
|Purchase of business- share price on the date of exchange | | | |
The cost of a combination includes liabilities incurred or assumed by the acquirer, in exchange for control of the acquiree.
Transaction costs are expensed. These include any costs directly attributable to the combination, such as professional fees paid to accountants, legal advisers, valuers and other consultants to effect the combination.
|EXAMPLE-Cost of a combination |
|You buy a company for $100m. You have incurred legal costs of $2m, which are expensed. |
| |I/B |DR |CR |
|Investment in subsidiary |B |$100m | |
|Cash |B | |$100m |
|Legal costs |I |$2m | |
|Cash |B | |$2m |
|Purchase of business - Cost of a combination | | | |
General administrative costs, including the costs of maintaining an acquisitions department, are also not included in the cost of the combination but are expensed when incurred.
|EXAMPLE – Costs included in a combination |
|The company costs $60m. Accounting costs are $5m (expensed), legal costs are $6m(expensed), general |
|overheads, relating to the acquisition team of $2m are also expensed. |
| |I/B |DR |CR |
|Investment in subsidiary |B |$60m | |
|Cash |B | |$60m |
|Accounting, legal and other costs |I |$11m | |
|Cash |I | |$11m |
|Purchase of business | | | |
Future losses or other costs expected to be incurred as a result of a combination, are not liabilities incurred for control of the acquiree and are not included as part of the cost of the combination.
|EXAMPLE-Future losses |
|You buy a company for $30m. You plan to make staff cuts costing $4m to make the company profitable. These |
|are future losses and will not be included as part of the cost of the combination. |
| |I/B |DR |CR |
|Investment in subsidiary |B |$30m | |
|Cash |B | |$30m |
|Purchase of business | | | |
Contingent liabilities are not future losses. They are liabilities from the past, which have been estimated, or there is uncertainty as to whether they will be paid.
The costs of arranging and issuing financial liabilities eg a debt issue, are part of the issue costs, even when the liabilities are issued to effect a combination. They are not costs of the combination. Such costs reduce the proceeds from the equity issue. (See IAS 32)
Adjustments to the cost of a combination contingent on future events
When a combination agreement provides for an adjustment to the cost contingent on future events, the acquirer must include the amount of that adjustment in the cost of the combination at the acquisition date, at a fair value based on its timing (discounted to net present value) and probability.
EXAMPLE- Adjustments to the cost, contingent on future events
You buy a company for $60m. You will pay an additional $10m, if the profit for the coming year is more than last year’s profit. This will be an adjustment to the cost, which is contingent on future events.
You will include the amount of that adjustment (discounted to net present value and multiplied by the percentage risk of payment) in the cost of the combination, at the acquisition date.
It is usually possible to estimate the amount of any such adjustment, but if events do not occur or the estimate needs to be revised, the cost of the combination must be adjusted accordingly within the first year of the acquisition. Later adjustments will go to the income statement.
In some circumstances, the acquirer may be required to make a subsequent payment to the seller.
EXAMPLE- Compensation for a reduction in shares issued
You buy a firm for $50m. Your seller wants cash. You prefer to issue shares.
You agree to issue 50m shares priced at $1 per share. If the price falls within the first 3 months, you will issue more shares as compensation.
The shares fall to $0,80. You provide an extra 12,5m shares in compensation.
In such cases, no increase in the cost of the combination is recorded.
In the case of shares, the fair value of the additional payment is offset by an equal reduction in the value, attributed to the shares initially issued.
|EXAMPLE-additional payment offset by a reduction in initial shares. |
|You buy a firm for $50m. Your seller wants cash. You prefer to issue shares. |
|You agree to issue 50m shares priced at $1 per share. (The par value of each share is $0,10.) If the price|
|falls within the first 3 months, you will issue more shares as compensation. |
|The shares fall to $0,80. You provide an extra 12,5m shares in compensation. |
| |I/B |DR |CR |
|Net Assets-various |B |$50m | |
|Shares |B | |$5m |
|Share premium |B | |$45m |
|First issue of shares | | | |
|Share premium |B |$10m | |
|Shares (12,5m * $0,80) |B | |$1m |
|Share premium |B | |$9m |
|Second issue of shares | | | |
In the case of debt instruments, the additional payment is regarded as a reduction in the premium, or an increase in the discount, on the initial issue.
|EXAMPLE-additional payment offset by a reduction in debt instruments. |
|You buy a firm for $100m. Your seller wants cash. You prefer to issue bonds. |
|You agree to issue 100m shares priced at $1 each. If the price falls within the first 3 months, you will |
|issue more bonds as compensation. |
|The bonds fall to $0,80. You provide an extra 25m bonds in compensation. |
| |I/B |DR |CR |
|Net Assets-various |B |$100m | |
|Bonds |B | |$100m |
|First issue of bonds | | | |
|Discount on bonds |B |$20m | |
|Bonds (25m * $0,80) |B | |$20m |
|Second issue of bonds | | | |
Allocating the cost to the assets acquired.
At the acquisition date, the acquirer must allocate the cost of a combination according to the fair values of identifiable assets and liabilities acquired.
The exceptions are non-current assets, or disposal groups, that are classified as ‘held for sale’ in accordance with IFRS 5, which must be recorded at ‘fair value, less costs to sell’.
|EXAMPLE- cost allocation |
|You buy a group of companies for $45m. You are going to sell one division and no selling cost will be |
|incurred. Its ‘fair value, less costs to sell’ is $8m. |
|The remaining business assets are worth $50m, liabilities are worth $11 and contingent liabilities are |
|worth $2m. For cost allocation purposes, the following analysis is made: |
| |I/B |DR |CR |
|Assets-various |B |$50m | |
|Cash |B | |$45m |
|Liabilities-various |B | |$11m |
|Contingent liabilities |B | |$2m |
|Assets ‘held for sale’ |B |$8m | |
|Purchase of business-cost allocation | | | |
The acquirer must record separately the acquiree’s identifiable assets, liabilities and contingent liabilities at the acquisition date only if they satisfy the following criteria, at that date if:
i assets other than an intangible assets – it is probable that any associated benefits will flow to the acquirer and its fair value can be measured reliably;
ii liability other than a contingent liability - it is probable that payment will be required to settle the obligation and its fair value can be measured reliably;
iii intangible assets or a contingent liabilities - its fair value can be measured reliably.
The consolidated accounts must reflect the values at acquisition.
For example an asset in the acquiree’s book at $5m may have, at acquisition, a fair value of $7m. In the consolidated accounts, the depreciation charge made in the subsidiary income statement will be based on $7m.
|EXAMPLE-income statement, based on the costs to the acquirer |
|You buy a foreign company. It has a building that cost $80m, 10 years before the merger. It is being |
|depreciated over 20 years, at $4million per year. It now has a carrying value of $40m (80m-10years*4m). |
|You are told that you cannot revalue the property in the local accounts. |
| |
|The building will continue to be depreciated at $4million per year, in the local accounts. |
| |
|In your consolidated accounts, the fair value is now $100m. You will depreciate it over the remaining 10 |
|years of its life, at $10m per year. |
| |
|Your consolidation adjustments will be: |
| |I/B |DR |CR |
|Property –cost |B | |$80m |
|Property-accumulated depreciation |B |$40m | |
|Property –revalued |B |$100m | |
|Revaluation reserve |B | |$60m |
|Consolidation adjustment at acquisition | | | |
|Property –depreciation |I |$6m | |
|Property-accumulated depreciation |B | |$6m |
|Year 1 additional charge in consolidated accounts | | | |
|Revaluation reserve |B |$6m | |
|Retained earnings |B | |$6m |
|Reserve movement see IAS16 workbook | | | |
Application of the acquisition method starts from the acquisition date, which is the date on which the acquirer effectively obtains control of the acquiree.
It is not necessary for a transaction to be finalised before the acquirer obtains control. All pertinent facts surrounding a combination must be considered, in assessing when the acquirer has obtained control.
EXAMPLE – Control, but transaction to be finalised
You buy a company. You have paid, have a binding agreement, but some registrations have yet to be completed before you become the legal owner.
Nonetheless, you have control, for accounting purposes.
As the acquirer records the acquiree’s identifiable assets, liabilities and contingent liabilities at their fair values at the acquisition date, any minority interest in the acquiree is stated at the minority’s proportion of the net fair value of those items.
|EXAMPLE- non-controlling interests’ (minority’s) proportion of the net fair value |
|You have bought 80% of a company for $400m. Its assets are valued at $700m and its liabilities are valued |
|at $500m. |
|It will be consolidated at the date of purchase as follows: |
| |I/B |DR |CR |
|Assets-various |B |$700m | |
|Liabilities-various |B | |$500m |
|Non-controlling interests 20% * $500m |B | |$40m |
|Goodwill | |$240m | |
|Investment in subsidiary |B | |$400m |
|Consolidation adjustment at acquisition | | | |
Contingent consideration
The consideration the acquirer transfers in exchange for the acquiree includes any asset or liability resulting from a contingent consideration arrangement.
The acquirer shall record the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree.
The acquirer shall classify an obligation to pay contingent consideration as a liability, or as equity on the basis of IAS 32 Financial Instruments, or other applicable IFRSs.
Additional guidance for applying the acquisition method to particular types of business combinations
A business combination achieved in stages
An acquirer sometimes obtains control of an acquiree in which it held an equity interest immediately before the acquisition date.
For example, on 31 December 20X1, Undertaking A holds a 35 per cent non-controlling equity interest in Undertaking B.
On that date, Undertaking A purchases an additional 40 per cent interest in Undertaking B, which gives it control of Undertaking B.
IFRS 3 refers to such a transaction as a business combination achieved in stages, sometimes also referred to as a step acquisition.
In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and record the resulting gain or loss, if any, in the income statement.
|EXAMPLE- buying a bank in stages |
|You have bought 35% of a bank. |
|Its fair value was $800m and you paid 35%* 800 = $280m. |
|(It has not been revalued since that date.) |
| |
|A year later, the value of the bank has increased to $1.000m. |
|You buy an additional 40% and pay 40%*1.000 = $400m |
|and take control. |
| |
|The increased value of the original 35% stake must be revalued to $350m and the increased value (350-280) |
|= $70m will be recorded in the income statement. |
| |I/B |DR |CR |
|Cost of investment in bank (35%) |B |$280m | |
|Cash |B | |$280m |
|Original investment in bank | | | |
|Cost of investment in bank (35%) |B |$70m | |
|Revaluation of investment in bank |I | |$70m |
|Revaluation of investment | | | |
|Cost of investment in bank (40%) |B |$400m | |
|Cash |B | |$400m |
|Second investment in bank | | | |
In prior reporting periods, the acquirer may have recognised changes in the value of its equity interest in the acquiree in other comprehensive income (for example, because the investment was classified an investment in an equity instrument that is not held for trading (IFRS 9)).
If so, the amount that was recognised in other comprehensive income shall be recognised on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest.
A business combination achieved without the transfer of consideration
An acquirer sometimes obtains control of an acquiree without transferring consideration. The acquisition method of accounting for a business combination applies to those combinations.
Such circumstances include:
(i) The acquiree repurchases a sufficient number of its own shares for an existing investor (the acquirer) to obtain control.
(ii) Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the acquirer held the majority voting rights.
(iii) The acquirer and acquiree agree to combine their businesses by contract alone. The acquirer transfers no consideration in exchange for control of an acquiree and holds no equity interests in the acquiree, either on the acquisition date or previously.
Examples of business combinations achieved by contract alone include bringing two businesses together in a stapling arrangement, or forming a dual-listed corporation.
In a business combination achieved by contract alone, the acquirer shall attribute to the owners of the acquiree the amount of the acquiree’s net assets recognised in accordance with IFRS 3.
The equity interests in the acquiree held by parties other than the acquirer are a non-controlling interest in the acquirer’s post-combination financial statements, even if the result is that all of the equity interests in the acquiree are attributed to the non-controlling interest.
Determining what is part of the business combination transaction
The acquirer and the acquiree may have a pre-existing relationship or other arrangement before negotiations for the business combination began, or they may enter into an arrangement during the negotiations that is separate from the business combination.
In either situation, the acquirer shall identify any amounts that are not part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination: amounts that are not part of the exchange for the acquiree.
The acquirer shall recognise as part of applying the acquisition method only the consideration transferred for the acquiree and the assets acquired and liabilities assumed in the exchange for the acquiree.
Separate transactions shall be accounted for in accordance with the relevant IFRSs.
A transaction entered into by or on behalf of the acquirer or primarily for the benefit of the acquirer or the combined undertaking, rather than primarily for the benefit of the acquiree (or its former owners) before the combination, is likely to be a separate transaction.
The following are examples of separate transactions that are not to be included in applying the acquisition method:
(i) a transaction that in effect settles pre-existing relationships between the acquirer and acquiree;
(ii) a transaction that remunerates employees, or former owners, of the acquiree for future services; and
(iii) a transaction that reimburses the acquiree, or its former owners, for paying the acquirer’s acquisition-related costs.
Acquisition-related costs
Acquisition-related costs are costs the acquirer incurs to effect a business combination.
Those costs include finder’s fees; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities.
The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception:
The costs to issue debt or equity securities shall be recognised in accordance with IAS 32. (These are not considered to be acquisition costs, but finance costs of the issues of financial instruments.)
Subsequent measurement and accounting
In general, an acquirer shall subsequently measure and account for assets, liabilities and equity instruments related to a business combination in accordance with other applicable IFRSs for those items.
However, IFRS 3 provides guidance on subsequently measuring and accounting for the following assets acquired, liabilities assumed or incurred and equity instruments issued in a business combination:
(i) reacquired rights;
(ii) contingent liabilities recognised as of the acquisition date;
(iii) indemnification assets; and
(iv) contingent consideration.
Reacquired rights
A reacquired right recognised as an intangible asset shall be amortised over the remaining contractual period of the contract in which the right was granted.
An acquirer that subsequently sells a reacquired right to a third party shall include the carrying amount of the intangible asset in determining the gain or loss on the sale.
Contingent liabilities
After initial recognition and until the liability is settled, cancelled or expires, the acquirer shall measure a contingent liability recognised in a business combination at the higher of:
(i) the amount that would be recognised in accordance with IAS 37;
and
(ii) the amount initially recognised (less, if appropriate, cumulative amortisation) recognised in accordance with IAS 18 Revenue.
This requirement does not apply to contracts accounted for in accordance with IFRS 9.
Indemnification assets
At the end of each subsequent reporting period, the acquirer shall measure an indemnification asset that was recognised at the acquisition date on the same basis as the indemnified liability or asset.
This is subject to any contractual limitations on its amount and, for an indemnification asset that is not subsequently measured at its fair value, management’s assessment of the collectibility of the indemnification asset.
The acquirer shall derecognise the indemnification asset only when it collects the asset, sells it or otherwise loses the right to it.
Contingent consideration
Some changes in the fair value of contingent consideration that the acquirer recognises after the acquisition date may be the result of additional information that the acquirer obtained after that date about facts and circumstances that existed at the acquisition date.
However, changes resulting from events after the acquisition date, such as meeting an earnings target, reaching a specified share price, or reaching a milestone on a research and development project, are not measurement period adjustments.
The acquirer shall account for changes in the fair value of contingent consideration that are not measurement period adjustments as follows:
(1) Contingent consideration classified as equity shall not be remeasured and its subsequent settlement shall be accounted for within equity.
(2) Contingent consideration classified as an asset, or a liability, that:
(i) is a financial instrument and is within the scope of IFRS 9 shall be measured at fair value, with any resulting gain, or loss, recognised either in profit or loss or in other comprehensive income in accordance with that IFRS.
(ii) is not within the scope of IFRS 9 shall be accounted for in accordance with IAS 37 or other IFRSs as appropriate.
Disclosures
The acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of a business combination that occurs either:
(a) during the current reporting period; or
(b) after the end of the reporting period but before the financial statements are authorised for issue.
The acquirer shall disclose the following information for each business combination that occurs during the reporting period:
(a) the name and a description of the acquiree.
(b) the acquisition date.
(c) the percentage of voting equity interests acquired.
(d) the primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree.
(e) a qualitative description of the factors that make up the goodwill recognised, such as expected synergies from combining operations of the acquiree and the acquirer, intangible assets that do not qualify for separate recognition or other factors.
(f) the acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major class of consideration, such as:
(i) cash;
(ii) other tangible or intangible assets, including a business or subsidiary of the acquirer;
(iii) liabilities incurred, for example, a liability for contingent consideration; and
(iv) equity interests of the acquirer, including the number of instruments or interests issued or issuable and the method of determining the fair value of those instruments or interests.
(g) for contingent consideration arrangements and indemnification assets:
(i) the amount recognised as of the acquisition date;
(ii) a description of the arrangement and the basis for determining the amount of the payment; and
(iii) an estimate of the range of outcomes (undiscounted) or, if a range cannot be estimated, that fact and the reasons why a range cannot be estimated. If the maximum amount of the payment is unlimited, the acquirer shall disclose that fact.
(h) for acquired receivables:
(i) the fair value of the receivables;
(ii) the gross contractual amounts receivable; and
(iii) the best estimate at the acquisition date of the contractual cash flows not expected to be collected.
The disclosures shall be provided by major class of receivable, such as loans, direct finance leases and any other class of receivables.
(i) the amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed.
(j) for each contingent liability recognised in accordance with IAS 37.
If a contingent liability is not recognised because its fair value cannot be measured reliably, the acquirer shall disclose:
(i) the information required by paragraph 86 of IAS 37; and
(ii) the reasons why the liability cannot be measured reliably.
(k) the total amount of goodwill that is expected to be deductible for tax purposes (if any).
(l) for transactions that are recognised separately from the acquisition of assets and assumption of liabilities in the business combination:
(i) a description of each transaction;
(ii) how the acquirer accounted for each transaction;
(iii) the amounts recognised for each transaction and the line item in the financial statements in which each amount is recognised; and
(iv) if the transaction is the effective settlement of a pre-existing relationship, the method used to determine the settlement amount.
(m) the disclosure of separately recognised transactions required by (l)
shall include the amount of acquisition-related costs and, separately, the amount of those costs recognised as an expense and the line item or items in the statement of comprehensive income in which those expenses are recognised.
The amount of any issue costs not recognised as an expense and how they were recognised shall also be disclosed.
(n) in a bargain purchase:
(i) the amount of any gain recognised and the line item in the statement of comprehensive income in which the gain is recognised; and
(ii) a description of the reasons why the transaction resulted in a gain.
(o) for each business combination in which the acquirer holds less than 100 per cent of the equity interests in the acquiree at the acquisition date:
(i) the amount of the non-controlling interest in the acquiree recognised at the acquisition date and the measurement basis for that amount; and
(ii) for each non-controlling interest in an acquiree measured at fair value, the valuation techniques and key model inputs used for determining that value.
(p) in a business combination achieved in stages:
(i) the acquisition-date fair value of the equity interest in the acquiree held by the acquirer immediately before the acquisition date; and
(ii) the amount of any gain or loss recognised as a result of remeasuring to fair value the equity interest in the acquiree held by the acquirer before the business combination and the line item in the statement of comprehensive income in which that gain or loss is recognised.
(q) the following information:
(i) the amounts of revenue and profit or loss of the acquiree since the acquisition date included in the consolidated statement of comprehensive income for the reporting period; and
(ii) the revenue and profit or loss of the combined undertaking for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period.
If disclosure of any of the information required is impracticable, the acquirer shall disclose that fact and explain why the disclosure is impracticable. Impracticable has the same meaning as in IAS 8.
For individually immaterial business combinations occurring during the reporting period that are material collectively, the acquirer shall disclose
in aggregate the information required above.
If the acquisition date of a business combination is after the end of the reporting period but before the financial statements are authorised for issue, the acquirer shall disclose the information unless the initial accounting for the business combination is incomplete at the time the financial statements are authorised for issue.
In that situation, the acquirer shall describe which disclosures could not be made and the reasons why they cannot be made.
The acquirer shall disclose information that enables users of its financial statements to evaluate the financial effects of adjustments recognised in the current reporting period that relate to business combinations that occurred in the period or previous reporting periods.
To meet this objective, the acquirer shall disclose the following information for each material business combination or in the aggregate for individually immaterial business combinations that are material collectively:
(a) if the initial accounting for a business combination is incomplete for particular assets, liabilities, non-controlling interests or items of consideration and the amounts recognised in the financial statements for the business combination thus have been determined only provisionally:
(i) the reasons why the initial accounting for the business combination is incomplete;
(ii) the assets, liabilities, equity interests or items of consideration for which the initial accounting is incomplete;
and
(iii) the nature and amount of any measurement period adjustments recognised during the reporting period.
(b) for each reporting period after the acquisition date until the undertaking collects, sells or otherwise loses the right to a contingent consideration asset, or until the undertaking settles a contingent consideration liability or the liability is cancelled or expires:
(i) any changes in the recognised amounts, including any differences arising upon settlement;
(ii) any changes in the range of outcomes (undiscounted) and the reasons for those changes; and
(iii) the valuation techniques and key model inputs used to measure contingent consideration.
(c) for contingent liabilities recognised in a business combination, the acquirer shall disclose the information required by IAS 37 for each class of provision.
d) a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period showing separately:
(i) the gross amount and accumulated impairment losses at the beginning of the reporting period.
(ii) additional goodwill recognised during the reporting period, except goodwill included in a disposal group that, on acquisition, meets the criteria to be classified as held for sale in accordance with IFRS 5.
(iii) adjustments resulting from the subsequent recognition of deferred tax assets during the reporting period.
(iv) goodwill included in a disposal group classified as held for sale in accordance with IFRS 5 and goodwill derecognised during the reporting period without having previously been included in a disposal group classified as held for sale.
(v) impairment losses recognised during the reporting period in accordance with IAS 36. (IAS 36 requires disclosure of information about the recoverable amount and impairment of goodwill in addition to this requirement.)
(vi) net exchange rate differences arising during the reporting period in accordance with IAS 21.
(vii) any other changes in the carrying amount during the reporting period.
(viii) the gross amount and accumulated impairment losses at the end of the reporting period.
(e) the amount and an explanation of any gain or loss recognised in the current reporting period that both:
(i) relates to the identifiable assets acquired or liabilities assumed in a business combination that was effected in the current or previous reporting period; and
(ii) is of such a size, nature or incidence that disclosure is relevant to understanding the combined undertaking’s financial statements.
If the specific disclosures required by this and other IFRSs do not meet the
objectives, the acquirer shall disclose whatever additional information is necessary to meet those objectives.
3. Identifying a business combination
A combination is the bringing together of separate undertakings into one reporting undertaking.
The result of nearly all combinations is that the ‘acquirer’ obtains control of one, or more, other businesses, the ‘acquiree’.
When an undertaking acquires a group of assets that does not constitute a business, it must allocate the cost between the individual identifiable assets and liabilities in the group, based on their relative fair values at the date of acquisition.
4. Method of Accounting
All combinations must be accounted for by applying the acquisition method. The acquisition method views a combination from the perspective of the acquirer.
This means that the accounting will always reflect one undertaking buying another, even if the combination is regarded as a merger of equals.
The acquirer purchases net assets and records the assets, liabilities and contingent liabilities.
APPLICATION OF THE ACQUISITION METHOD
Applying the acquisition method involves the following steps:
i) identifying an acquirer;
ii) determining the acquisition date;
iii) recognising and measuring the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the
acquiree; and
(iv) recognising and measuring goodwill or a gain from a bargain
purchase (negative goodwill)..
As the acquisition method views a combination from the acquirer’s perspective, it assumes that one of the parties can be identified as the acquirer.
Cost of a combination
Acquiree’s identifiable assets and liabilities
i) As part of allocating the cost of the combination, the acquirer must record existing liabilities for restructuring, or for reducing the activities of the acquiree.
ii)
EXAMPLES- liability for restructuring
1. You buy a group of companies. A month before the purchase, the previous management had announced plans to close a division and made a provision for restructuring. This provision can be used by you as part of allocating the cost of the combination.
2. You buy a company for $80m. You plan to make staff cuts costing $5m to make the company profitable. These are future losses and will not be included as part of the cost of the combination. The acquiree did not have an existing liability for restructuring at the balance sheet date.
ii) the acquirer, when allocating the cost of the combination, must not record liabilities for future losses or other costs expected to be incurred, as a result of the combination.
A payment that an undertaking is contractually required to make is regarded as a contingent liability, until it becomes probable that a combination will take place.
EXAMPLE-Golden parachutes
Your board members will each be paid $1m if the company is sold
‘golden parachutes’. This is a contingent liability, until it is likely that the company will be sold. It is then reclassified as a liability and recorded by the acquirer, as part of allocating the cost of the combination.
The contractual obligation is recorded when a combination becomes probable and the liability can be measured reliably.
When the combination is effected, such a liability of the acquiree is recorded by the acquirer, as part of allocating the cost of the combination.
An acquiree’s restructuring plan conditional upon being acquired is neither a present obligation, nor a contingent liability, before the combination. Therefore, an acquirer must not record a liability for such restructuring plans, as part of allocating the cost of the combination.
EXAMPLE- conditional restructuring plans
You are going buy a group of companies. A condition is that the acquiree records provisions for restructuring, that will occur if the merger occurs. These provisions cannot be used as part of allocating the cost of the combination.
The identifiable assets and liabilities include all of the acquiree’s financial assets and financial liabilities.
They might also include assets and liabilities not previously recorded in the acquiree’s financial statements, eg because they did not qualify for recognition before the acquisition.
EXAMPLE- assets not previously recorded in the acquiree’s financial statements
You buy a business that has been generating tax losses for many years. The tax credits have not been recorded, as there was no likelihood of them being used. You will bring in contracts that will make the business profitable. The tax authorities have confirmed that you will be able to use the brought-forward losses. These tax losses can be valued as an asset as part of allocating the cost of the combination.
Combination achieved in stages
A combination may involve more than one exchange transaction, for example when it occurs in stages by successive share purchases.
If so, each exchange transaction must be treated separately by the acquirer.
The cost of the transaction and fair value information at the date of each exchange transaction is used to determine the amount of any goodwill associated with that transaction.
This results in a step-by-step comparison of the cost and fair values at each step.
The fair values of the acquiree’s net assets may be different at the date of each exchange transaction.
As:
i the acquiree’s net assets are notionally restated to their fair values at the date of each exchange transaction to determine the amount of any goodwill associated with each transaction; and
ii the acquiree’s net assets must then be recorded by the acquirer at their fair values at the acquisition date,
any adjustment to those fair values, relating to previously held interests of the acquirer and must be accounted for as a revaluation.
|EXAMPLE - Property, Plant and Equipment acquired |
|You buy a company whose fixed assets are in the acquiree’s books at $12m. |
|Their fair value is $14m, which you record in your consolidated statements. |
| |I/B |DR |CR |
|Property, Plant and Equipment |B |$2m | |
|Revaluation reserve |B | |$2m |
|Property, Plant and Equipment revaluation | | | |
For the classifications of IAS 16 Property, Plant and Equipment, the fair value of the assets when acquired is their cost to the group, not a revaluation.
EXAMPLE - Property, Plant and Equipment acquired
You buy a company whose fixed assets are in the acquiree’s books at $12m.
Their fair value is $14m, which you record in your consolidated statements.
These are classified as ‘Property, Plant and Equipment stated at cost’ in the notes not as ‘Property, Plant and Equipment at valuation’.
Before qualifying as a combination, a transaction may qualify as an investment in an associate and be accounted for in accordance with IAS 28, using the equity method.
In applying the equity method to the investment, the fair values of the investee’s identifiable net assets at the date of each earlier exchange transaction will have been determined previously.
Under the revised IFRS 3, each time new shares in a company are purchased, the previously-owned shares are revalued and any increase or decrease goes to the income statement.
EXAMPLE - Combination achieved in stages
You agree to buy a company. You will buy 20% of the shares on January 1st, another 50% on March 1st and the final 30% on June 1st.
On January 1st the company will be an associate. On March 1st it will become a subsidiary.
5. Allocating the cost of a combination
IFRS 3 requires an acquirer to record the acquiree’s net assets, at their fair values, at the acquisition date. For the purpose of allocating the cost of a combination, the acquirer must treat the following measures as fair values:
1 for financial instruments, traded in an active market, the acquirer must use current market values.
2 for financial instruments not traded in an active market, the acquirer must use estimated values that take into consideration features such as price-earnings ratios, dividend yields and expected growth rates of comparable instruments of undertakings with similar characteristics.
3 for receivables, beneficial contracts and other identifiable assets, the acquirer must use the present values of the amounts to be received, determined at appropriate current interest rates, less allowances for doubtful debts and collection costs.
Discounting is not required for short-term receivables, beneficial contracts and other identifiable assets, unless the impact is material.
4) for inventories of:
i finished goods and merchandise, use selling prices less the sum of the costs of disposal and a reasonable profit allowance.
Profit is based on the selling effort, and profit for similar finished goods and merchandise;
ii work in progress, use selling prices of finished goods less the sum of:
costs to complete, costs of disposal and a reasonable profit allowance for the completing and selling effort based on profit for similar finished goods;
iii raw materials, use current replacement costs.
5 for land and buildings, use market values.
6 for plant and equipment, use market values, normally determined by appraisal.
If there is no market-based evidence of fair value, because of the specialised nature of the item of plant and equipment and the item is rarely sold, except as part of a continuing business, estimate fair value, using an income, or a depreciated replacement cost, approach.
7 for intangible assets, the acquirer must determine fair value:
i by reference to an active market, as defined in IAS 38; or
ii if no active market exists, on a basis that reflects the amounts the acquirer would have paid for the assets, in transactions between independent willing parties, based on the best information available see IAS 38.
8 for net employee benefit assets or liabilities for defined benefit plans, the acquirer must use the present value of the defined benefit obligation, less the fair value of any plan assets.
9 for tax assets and liabilities, the acquirer must use the amount of the tax benefit arising from tax losses or the taxes payable in accordance with IAS 12 Income Taxes, assessed from the perspective of the combined undertaking.
The tax asset or liability is determined, after allowing for the tax effect of restating net assets to their fair values and is not discounted.
10 for accounts and notes payable, long-term debt, liabilities, accruals and other claims payable, use the present values of amounts to be paid in settling the liabilities, determined at appropriate current interest rates.
Discounting is not required for short-term liabilities, unless the impact is material.
11 for onerous contracts and other identifiable liabilities of the acquiree, the acquirer must use the present values of payments in settling the obligations, determined at appropriate current interest rates.
12 for contingent liabilities of the acquiree, the acquirer must use the amounts that a third party would charge to assume those contingent liabilities. Such an amount must reflect all expectations about possible cash flows and not the single most likely nor the expected maximum, or minimum, cash flow.
Present value techniques may always be used in estimating the fair values.
6. Intangible assets
The acquirer records an intangible asset at the acquisition date, only if it meets the definition of an intangible asset in IAS 38.
|EXAMPLE – acquiree intangible assets |
|The acquirer records as an asset separately from goodwill an in-process research and development project |
|of the acquiree, as it meets the definition of an intangible asset and its fair value can be measured |
|reliably. |
Identifiability criteria
Is the intangible asset:
i is separable, capable of being separated or divided from the undertaking and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability; or
ii arises from contractual or legal rights, regardless of whether those rights are transferable or separable from the undertaking, or from other rights and obligations.
Previously recorded intangible assets
The carrying amount of an item classified as an intangible asset that either:
i was acquired in a combination before 31 March 2004 or
ii arises from an interest in a jointly-controlled undertaking obtained before 31 March 2004 and accounted for by applying proportionate consolidation
must be reclassified as goodwill at the beginning of the first annual period beginning on or after 31 March 2004, if that intangible asset does not at that date meet the identifiability criterion in IAS 38.
|EXAMPLE- Previously recorded intangible assets |
|You have $36m of assets that were classified as intangibles, prior to 31 March 2004. They no longer meet |
|the IAS 38 criteria. They will be written off, by reclassifying them as goodwill. |
| |I/B |DR |CR |
|Goodwill |B |$36m | |
|Intangible assets- net |B | |$36m |
|Intangible assets reclassified as goodwill | | | |
Acquiree’s contingent liabilities
The acquirer records separately a contingent liability as part of allocating the cost of a combination, only if its fair value can be measured reliably.
If fair value cannot be measured reliably:
i there is a resulting effect on the amount recorded as goodwill; and
ii the acquirer must disclose the information about that contingent liability see IAS 37.
After their initial recognition, the acquirer must measure contingent liabilities at the higher of:
i the amount that would be recorded under IAS 37 and
ii the amount initially recorded.
The acquirer must disclose for those contingent liabilities, the information required by IAS 37, for each class of provision.
7. Goodwill
The acquirer must, at the acquisition date:
i record goodwill acquired in a combination as an asset; and
ii initially measure that goodwill at its cost.
This is the net fair value of the identifiable assets, liabilities and contingent liabilities less the cost.
|EXAMPLE- Goodwill calculation |
|You buy a group for $55m. You are going to sell one division no selling cost will be incurred. Its ‘fair |
|value, less costs to sell’ is $8m. For the remaining business, assets are worth $50m, liabilities are |
|worth $11 and contingent liabilities are worth $2m. |
|The premium that you have paid for the group is $10m, as you have net assets of only $45m for the $55m you|
|have paid: |
| |I/B |DR |CR |
|Goodwill |B |$10m | |
|Assets-various |B |$50m | |
|Cash |B | |$55m |
|Liabilities-various |B | |$11m |
|Contingent liabilities |B | |$2m |
|Assets ‘held for sale’ |B |$8m | |
|Purchase of business-cost allocation | | | |
Goodwill represents a payment made by the acquirer, in anticipation of benefits from assets, that are not capable of being individually identified and separately recorded.
After initial recognition, the acquirer must test goodwill acquired for impairment annually or more frequently and measure at cost, less any accumulated impairment losses.
|EXAMPLE-Goodwill Impairment |
|You purchase a group and pay $20m for the goodwill. You do not amortise it. |
|You test it for impairment each year. At the end of the third year, you find that it is worth only $14m. |
|You record an impairment loss of $6m. |
| |I/B |DR |CR |
|Goodwill |B | |$6m |
|Impairment loss - goodwill |I |$6m | |
|Year 3 Impairment loss | | | |
Previously-recorded goodwill
For any goodwill that has been amortised, an undertaking must:
i from the beginning of the first annual period beginning on or after 31 March 2004, discontinue amortising such goodwill;
ii at the beginning of the first annual period beginning on or after 31 March 2004, eliminate the carrying amount of the related accumulated amortisation, with a corresponding decrease in goodwill; and
|EXAMPLE - Revised accounting for goodwill |
|You bought a group for $800m. When the initial accounting for a combination was complete, you value net |
|assets at $720m so goodwill is $80m (800m-720m). At 31 March 2004, accumulated amortisation of the |
|goodwill was $12m. You eliminate the accumulated amortisation, with a corresponding decrease in goodwill. |
| |I/B |DR |CR |
|Goodwill – Accumulated amortisation |B |$12m | |
|Goodwill |B | |$12m |
|Elimination of accumulated amortisation of goodwill | | | |
iii from the beginning of the first annual period beginning on or after 31 March 2004, test the goodwill for impairment in accordance with IAS 36.
|EXAMPLE-Goodwill Impairment |
|You purchase a group and pay $40m for the goodwill. |
|You do not amortise it. |
|You test it for impairment each year. At the end of the third year, you find that it is worth only $34m. |
|You record an impairment loss of $6m. |
| |I/B |DR |CR |
|Goodwill |B | |$6m |
|Impairment loss - goodwill |I |$6m | |
|Year 3 Impairment loss | | | |
If goodwill was previously recorded as a deduction from equity, it must not be recorded in the income statement:
either on disposal of all, or part, of the business, to which that goodwill relates, or on impairment of a cash-generating unit to which the goodwill relates.
Negative goodwill
If the net assets acquired are worth more than the price paid, the surplus negative goodwill is recorded immediately in the income statement.
Before doing so, all assets, liabilities and contingent liabilities should be reviewed to ensure that they have been properly accounted for.
|EXAMPLE-Negative goodwill |
|You buy a group for $150m. The fair value of the net assets is $155m. |
|The $5m is credited to the income statement. |
| |I/B |DR |CR |
|Net assets-various |B |$155m | |
|Cash |B | |$150m |
|Negative goodwill |I | |$5m |
|Negative goodwill taken to the income statement | | | |
Previously-recorded negative goodwill
The carrying amount of negative goodwill at the beginning of the first annual period beginning on, or after, 31 March 2004 that arose from either
i a combination, for which the agreement date was before 31 March 2004 or
ii an interest in a jointly-controlled undertaking (see IFRS 11 workbook) obtained before 31 March 2004 and accounted for by applying proportionate consolidation
must be derecognised at the beginning of that period, with a corresponding adjustment to the opening balance of retained earnings.
|EXAMPLE – Negative goodwill derecognition |
|At 31 March 2004, you are carrying negative goodwill of $55m, relating to an earlier acquisition. You |
|credit it to the opening balance of retained earnings. |
| |I/B |DR |CR |
|Opening retained earnings |B | |$55m |
|Negative goodwill |B |$55m | |
|Negative goodwill derecognition | | | |
8. Provisional Accounting
Measurement period
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete.
During the measurement period, the acquirer shall retrospectively adjust the provisional amounts recognised at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognised as of that date.
During the measurement period, the acquirer shall also recognise additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of that date.
The measurement period ends as soon as the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable.
However, the measurement period shall not exceed one year from the acquisition date.
The measurement period provides the acquirer with a reasonable time to obtain the information necessary to identify and measure the following as of the acquisition date:
(i) the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree;
(ii) the consideration transferred for the acquiree (or the other amount used in measuring goodwill);
(iii) in a business combination achieved in stages, the equity interest in the acquiree previously held by the acquirer; and
(iv) the resulting goodwill, or gain on a bargain purchase.
The acquirer shall consider all pertinent factors in determining whether information obtained after the acquisition date should result in an adjustment to the provisional amounts recognised or whether that information results from events that occurred after the acquisition date.
Pertinent factors include the date when additional information is obtained and whether the acquirer can identify a reason for a change to provisional amounts.
Information that is obtained shortly after the acquisition date is more likely to reflect circumstances that existed at the acquisition date than is information obtained several months later.
For example, unless an intervening event that changed its fair value can be identified, the sale of an asset to a third party shortly after the acquisition date for an amount that differs significantly from its provisional fair value determined at that date is likely to indicate an error in the provisional amount.
The acquirer recognises an increase (decrease) in the provisional amount recognised for an identifiable asset (liability) by means of a decrease (increase) in goodwill.
However, new information obtained during the measurement period may sometimes result in an adjustment to the provisional amount of more than one asset or liability.
For example, the acquirer might have assumed a liability to pay damages related to an accident in one of the acquiree’s facilities, part or all of which are covered by the acquiree’s liability insurance policy.
If the liability is insured, any change to the liability will be matched by a change to the insurance claim. If it is partly-insured, then part of the change in liability will be matched by the insurance claim.
During the measurement period, the acquirer shall recognise adjustments to the provisional amounts as if the accounting for the business combination had been completed at the acquisition date.
Thus, the acquirer shall revise comparative information for prior periods presented in financial statements as needed, including making any change in depreciation, amortisation or other income effects recognised in completing the initial accounting.
EXAMPLE provisional values
You buy a group in November. At your year-end in December, some foreign assets have yet to be fair valued. Provisional values can be used.
EXAMPLE – Date relating to the valuation
You buy a group in November. At your year-end in December, some foreign assets have yet to be fair valued. When they are finally valued, the valuation relates to the purchase date in November, not the date of the actual valuation.
Goodwill must be adjusted from the acquisition date, to balance any adjustment to the provisional values.
|EXAMPLE-Provisional valuation and the impact on goodwill |
|You buy a group in November for $700m. At your year-end in December, some foreign assets have yet to be |
|fair valued. |
| |
|Your provisional figures plus the actual valuations of other assets value net assets at $680m. This yields|
|a goodwill figure of $20m (700m-680m). |
| |
|When all the valuations are finalised, the value of all the net assets falls to $650m. You increase |
|goodwill to $50m (700m-650m). |
| |I/B |DR |CR |
|Goodwill |B |$30m | |
|Net assets-various |B | |$30m |
|Revision of provisional valuation | | | |
Comparative information is adjusted for revisions to the provisional figures.
Adjustments after the initial accounting is complete
After the measurement period ends, adjustments must be recorded only to correct an error in accordance with IAS 8.
EXAMPLE – Valuation errors
You buy a group. After you have completed the initial accounting for a combination, you find that $7m of consignment inventory never existed.
This must be recorded as an error. See IAS 8 workbook.
Adjustments to the initial accounting for a combination, after that accounting is complete, must not be recorded for the effect of changes in estimates.
IAS 8 requires an undertaking to account for an error correction retrospectively and to present financial statements as if the error had never occurred, by restating the comparative information for the prior periods in which the error occurred.
The carrying amount requiring correction must be calculated as if its fair value had been recorded from the acquisition date.
Goodwill must be adjusted retrospectively by an equal amount.
|EXAMPLE - Revised accounting for a combination and goodwill |
|You buy a group for $700m. When the initial accounting for a combination is complete, you value net assets|
|at $680m so goodwill is $20m (700m-680m). |
|When an error is found, the value of all the net assets falls to $650m. You increase goodwill to $50m |
|(700m-650m). |
| |I/B |DR |CR |
|Goodwill |B |$30m | |
|Net assets-various |B | |$30m |
|Revision of valuation | | | |
Recognition of deferred tax assets after the initial accounting is complete
Within the measurement period, if the potential benefit of the acquiree’s income tax loss carry-forwards or other deferred tax assets did not initially satisfy the criteria for separate recognition, but is subsequently realised, the acquirer must record that benefit as income in accordance with IAS 12 Income Taxes.
In addition, the acquirer must reduce the carrying amount of goodwill and expense the amount of the reduction. The creation or increase in negative goodwill must not result.
|EXAMPLE - Revised accounting for deferred tax and goodwill |
|You bought a group for $800m. The initial value net of assets was $725m so goodwill was $75m (800m-725m). |
| |
|A deferred tax asset of $15m has since been realised. It had not been recognised within the $725. Goodwill|
|is decreased to $60m (800m-740m). |
|The deferred tax asset is shown as income and the goodwill reduction is expensed. |
| |I/B |DR |CR |
|Goodwill – write off |I |$15m | |
|Goodwill |B | |$15m |
|Deferred tax asset |B |$15m | |
|Tax |I | |$15m |
|Deferred tax asset recognition | | | |
|EXAMPLE - deferred tax less than goodwill |
|You bought a group for $800m and you value net assets at $725m so goodwill is $75m (800m-725m). |
| |
|In this example the goodwill is less than the deferred tax asset: |
|A deferred tax asset of $90m has since been realised. It had not been recognised within the $725. Goodwill|
|is eliminated, but no negative goodwill is created. |
| |
|The deferred tax asset is shown as income and the goodwill reduction is expensed. |
| |I/B |DR |CR |
|Goodwill – write off |I |$75m | |
|Goodwill |B | |$75m |
|Deferred tax asset |B |$90m | |
|Tax |I | |$90m |
|Deferred tax asset recognition | | | |
Limited retrospective application
An undertaking is permitted to apply the requirements of IFRS 3 to goodwill existing at any date before 31 March 2004, provided the undertaking also applies IAS 36 and IAS 38 prospectively. All valuations and other information must be obtained at the time of initial accounting for the combinations.
9. Reverse acquisitions
In reverse acquisitions, the acquirer’s shares are acquired and the issuer is the acquiree.
For example, a private undertaking arranges to have itself ‘acquired’ by a smaller listed company to obtain a stock exchange listing.
Legally the issuer is regarded as the parent and the acquiree is regarded as the subsidiary. In control terms, the subsidiary may have the power to control the financial and operating policies of the legal parent.
EXAMPLE-Reverse acquisition-parent and acquirer
‘Small’ buys ‘Big’ in a reverse acquisition.
Small is the legal parent, but Big is the acquirer as it dictates the financial and operating policies of Small.
The allocation of the cost of the combination and the calculation of goodwill, is based on the net assets of Small.
Big’s assets are not revalued to fair value but Small’s are, to establish the cost of combination and goodwill.
Reverse acquisition accounting determines the allocation of the cost of the combination as at the acquisition date and does not apply to transactions after the combination.
Cost of the combination
The cost of the combination includes the fair value of shares are issued as part of the cost of the combination.
If there is no published price, the fair value of the shares can be estimated, by reference to the fair value of the acquirer, or the fair value of the acquiree, whichever is clearer.
In a reverse acquisition, the cost of the combination is deemed to have been incurred by the legal subsidiary (legal acquirer).
EXAMPLE- Reverse acquisition-cost of combination
‘Small’ buys ‘Big’ in a reverse acquisition. The cost of the combination is deemed to have been incurred by Big, in the form of shares issued by Big to Small.
Preparation and presentation of consolidated financial statements
Consolidated financial statements, prepared following a reverse acquisition, must be issued under the name of the legal parent, but described in the notes as a continuation of the financial statements of the legal subsidiary: the acquirer for accounting purposes.
EXAMPLE- Reverse acquisition-cost of combination
‘Small’ buys ‘Big’ in a reverse acquisition. Consolidated financial statements will be issued in the name of Small, but described as a continuation of those of Big.
As such consolidated financial statements represent a continuation of the financial statements of the legal subsidiary:
i) the assets and liabilities of the legal subsidiary must be recorded in those consolidated financial statements, at their pre-combination carrying amounts.
EXAMPLE- Reverse acquisition-no asset revaluation to fair value
‘Small’ buys ‘Big’ in a reverse acquisition. Big’s assets are not revalued to fair value, but remain at their carrying amounts from before the combination. Small’s assets would be revalued, to establish the cost of combination and goodwill.
Small’s net assets were $15m, revalued to $20m. Big’s net assets were $100m, and have not been revalued.
ii) the retained earnings and other equity balances must be the retained earnings and other equity balances of the legal subsidiary, immediately before the combination.
EXAMPLE- Reverse acquisition-retained earnings
‘Small’ buys ‘Big’ in a reverse acquisition. Consolidated financial statements will use Big’s retained earnings and other equity balances, rather than those of small.
(iii) the amount recorded as issued shares must be determined by adding the cost of the combination, to the issued equity of the legal subsidiary, immediately before the combination.
EXAMPLE- Reverse acquisition-shares
‘Small’ buys ‘Big’ in a reverse acquisition. Consolidated financial statements show the amount of Big’s issued shares from before the merger, plus the amount of additional shares issued by Small. This provides the total value.
The description of the number and type of shares will relate to the legal capital of Small.
However, the equity the number and type of shares issued must reflect the equity structure of the legal parent, including the shares issued by the legal parent, to effect the combination.
iv comparative information must be that of the legal subsidiary.
EXAMPLE- Reverse acquisition- comparative information
‘Small’ buys ‘Big’ in a reverse acquisition. Consolidated financial statements show the comparative figures of Big for previous periods.
Reverse acquisition accounting applies only in the consolidated financial statements.
In the legal parent’s separate financial statements, the investment in the legal subsidiary is accounted for in accordance with the requirements in IAS 27.
EXAMPLE- Reverse acquisition- parent’s separate financial statements
‘Small’ buys ‘Big’ in a reverse acquisition. Small’s parent company balance sheet shows Big as an investment in subsidiary.
Consolidated financial statements, prepared following a reverse acquisition, must reflect the fair values of the net assets and contingent liabilities of the legal parent the acquiree for accounting purposes.
EXAMPLE- Reverse acquisition- minority interests 2
‘Small’ buys ‘Big’ in a reverse acquisition. Some of Big’s shareholders choose not to sell to Small. They will be interested only in the results of Big, as they have no stake in Small.
The cost of the combination must be allocated by measuring the identifiable assets, liabilities and contingent liabilities of the legal parent, at their fair values at the acquisition date.
Any excess of the cost of the combination, over the net fair value of those items, must be accounted for as goodwill. The reverse is negative goodwill.
Non-controlling (Minority) interest
Some of the owners of the legal subsidiary may not exchange their shares for those of the legal parent and they must be treated as a Non-controlling (minority) interest in the consolidated financial statements, prepared after the reverse acquisition.
EXAMPLE- Reverse acquisition- minority interests 1
‘Small’ buys ‘Big’ in a reverse acquisition. Some of Big’s shareholders choose not to sell to Small. They will be minority interests in the consolidated financial statements.
The owners of the legal subsidiary that do not exchange their shares for shares of the legal parent have an interest only in the results and net assets of the legal subsidiary and not in the results and net assets of the combined undertaking.
EXAMPLE- Reverse acquisition- minority interests 2
‘Small’ buys ‘Big’ in a reverse acquisition. Some of Big’s shareholders choose not to sell to Small. They will be interested only in the results of Big, as they have no stake in Small.
Conversely, all of the owners of the legal parent, notwithstanding that the legal parent is regarded as the acquiree, have an interest in the results and net assets of the combined undertaking.
EXAMPLE- Reverse acquisition- minority interests 3
‘Small’ buys ‘Big’ in a reverse acquisition. Some of Big’s shareholders choose not to sell to Small. All Small’s shareholders have an interest in both Small and Big.
As the assets and liabilities of the legal subsidiary are recorded in the consolidated financial statements, at their pre-combination carrying amounts, the minority interest must reflect the minority shareholders’ proportionate interest in the pre-combination carrying amounts of the legal subsidiary’s net assets.
EXAMPLE- Reverse acquisition- minority interests 4
‘Small’ buys ‘Big’ in a reverse acquisition. 25% of Big’s shareholders choose not to sell to Small. As Big’s net assets have not been revalued to fair values and remain at their $100m carrying value, from just prior to the merger. The minority interests’ share remains at $25m, based on Big’s pre-combination carrying amounts .
Earnings per share
The equity structure appearing in the consolidated financial statements, following a reverse acquisition, reflects the equity structure of the legal parent, including the shares issued by the legal parent to effect the combination.
EXAMPLE- Reverse acquisition- EPS 1
‘Small’ buys ‘Big’ in a reverse acquisition. The shares of Small are used for the consolidated financial statements.
For the purpose of calculating the weighted-average number of ordinary shares outstanding the denominator, during the period in which the reverse acquisition occurs:
(i) the number of ordinary shares, outstanding from the beginning of that period to the acquisition date, must be deemed to be the number of ordinary shares issued by the legal parent to the owners of the legal subsidiary; and
iii) the number of ordinary shares, outstanding from the acquisition date to the end of that period, must be the actual number of ordinary shares of the legal parent outstanding during that period.
EXAMPLE- Reverse acquisition- EPS 2
‘Small’ buys ‘Big’ in a reverse acquisition. Small had 100 shares issued prior to the merger. It then issued 2.000 shares to Big’s owners.
For calculating the EPS, 2.000 not 100 is the number of shares for the period prior to the merger. 2.100 is the number following the merger.
The earnings per share for each comparative period before the acquisition date, must be calculated by dividing the income of the subsidiary by the number of shares issued by the parent to the owners of the subsidiary in the reverse acquisition.
EXAMPLE- Reverse acquisition- EPS 3
‘Small’ buys ‘Big’ in a reverse acquisition. Small had 100 shares issued prior to the merger. It then issued 2.000 shares to Big’s owners. Comparative EPS figures for previous figures should use Big’s earnings for the period and divide them by 2.000 shares.
This assumes that there were no changes, in the number of the legal subsidiary’s issued ordinary shares during the comparative periods and during the period, from the beginning of the period in which the reverse acquisition occurred, to the acquisition date.
The calculation of earnings per share must be adjusted, to take into account a change in the number of the legal subsidiary’s issued ordinary shares, during those periods. See IAS 33.
10. PRACTICAL ISSUES
FAIR VALUE EXERCISE
In-progress research and development is regarded as an intangible asset when purchased.
Intangible assets do not need to be individually separable and should be recorded, even if negative goodwill arises.
Measurable contingent liabilities are now required to be recorded when purchased.
ALLOCATING GOODWILL TO CASH-GENERATING UNITS CGU’s
Allocation of goodwill needs objective support for each decision. The anticipated synergies of the merger should be identified, as the CGU’s (Cash Generating Units) will have to support the recoverable amount of goodwill or suffer an impairment charge.
The disclosure requirements are exhaustive.
They include information about goodwill and the CGU’s to which it is allocated.
Allocation should be made before the end of the accounting period following the acquisition. Failure to do so has to be explained and may suggest that the acquisition was made without a clear strategic view.
IMPAIRMENT TESTS
Impairment tests must now be carried out annually for all CGU’s with goodwill, or indefinite-lived intangible assets. Impairment tests have become a core element in the day-to-day internal financial reporting process. The consistency and robustness of management’s assertions over time is crucial.
Goodwill amortisation has disappeared, but the transition rules do not require restatement of past transactions, so there may be an immediate positive impact on earnings.
More intangible assets will result in more amortisation.
The new treatments of limiting restructuring provisions and liquidating negative will impact earnings.
The acquisition process will become more rigorous, from planning to execution.
More thorough evaluation of targets and structuring of deals will be required, in order to withstand greater market scrutiny.
11. Combinations involving undertakings under common control outside the scope of IFRS 3
A combination involving undertakings under common control is a combination in which all of the combining undertakings are ultimately controlled by the same party or parties, both before and after the combination and that control is not transitory.
A group of individuals must be regarded as controlling an undertaking when as a result of contractual arrangements they collectively have the power to govern its financial and operating policies.
A combination is outside the scope of IFRS 3 when the same group of individuals has ultimate collective power to govern the financial and operating policies of each of the combining undertakings and that power is not transitory.
An undertaking can be controlled by an individual or by a group, acting together under a contractual arrangement and that individual or group may not be subject to the financial reporting requirements of IFRSs.
The extent of minority interests in each of the combining undertakings before and after, the combination is not relevant to determining whether the combination involves undertakings under common control.
12. MULTICHOICE QUESTIONS
1. IFRS 3:
1. Allows either the unitings of interest method, or the acquisition method.
2. Allows only the unitings of interest method.
3. Allows only the acquisition method.
2. Under IFRS 3, acquired contingent liabilities are:
1. Always included in the cost of combination.
2. Included in the cost of combination, only if they can be reliably measured.
3. Included in goodwill.
3. Goodwill should be:
1.Tested annually for impairment.
2. Held at cost.
3. Amortised.
4. Negative goodwill should be:
1. Matched to future losses.
2. Allocated to non-current assets.
3. Recorded in the income statement.
5. The result of nearly all combinations is that the:
1. ‘Acquirer’ obtains control of the ‘acquiree’.
2. ‘Acquiree’ obtains control of the ‘acquirer’.
3. ‘Acquirer’ is a partner of the ‘acquiree’.
6. A combination may involve:
i) The purchase of the equity of another undertaking.
ii) The purchase of all the net assets of another undertaking.
iii) The assumption of the liabilities of another undertaking.
iv) The purchase of some of the net assets of another undertaking, that together form one or more businesses.
v) The purchase of assets from a firm in liquidation.
1. i – ii
2. i – iii
3. ii – iii
4. i – iv
5. i – v
7. Applying the acquisition method involves the following steps:
i Identifying an acquirer.
ii Measuring the cost of the combination.
iii Allocating, at the acquisition date, the cost of the combination to the assets acquired and liabilities and contingent liabilities assumed.
iv Amortising the goodwill.
1. i – ii
2. i – iii
3. ii – iii
4. i – iv
8. Control is the power:
1. To govern the financial and operating policies of an undertaking.
2. To control more than 40% of the ordinary shares.
3. Appoint board members in proportion to your shareholding.
9. To identify an acquirer, indications that one exists are:.
i If the fair value of one of the undertakings is greater than that of the other, the greater is likely to be the acquirer.
ii If the combination is effected through an exchange of voting ordinary equity instruments for cash or other assets, the undertaking giving up cash or other assets is likely to be the acquirer.
iii If the combination results in the management of one of the undertakings being able to run the combined undertaking, the undertaking whose management is able to dominate is likely to be the acquirer.
iv In a combination effected through an exchange of shares, the undertaking that issues the shares is normally the acquirer.
v In a combination effected through an exchange of shares, the older undertaking is normally the acquirer.
1. i – ii
2. i – iii
3. ii – iii
4. i – iv
5. i – v
10. When a new undertaking is formed to effect a combination:
1. There will be no acquirer.
2. 0ne of the undertakings that existed before the combination must be identified as the acquirer.
3. The new undertaking will be the acquirer.
11. The cost of a combination includes:
i) Liabilities incurred or assumed by the acquirer.
ii) Professional fees paid to accountants.
iii) Legal advisers’ fees.
iv) Valuers’ fees.
v) General administrative costs
1. i
2. i – iii
3. ii – iii
4. i – iv
5. i – v
12. Future losses are:
1. Liabilities incurred for control of the acquiree.
2. Included as part of the cost of the combination.
3. Neither 1 nor 2.
13. For an adjustment to the cost of the combination contingent on future events, the acquirer must include the amount of that adjustment in the cost of the combination at the acquisition date, if the adjustment is:
1. Probable and can be measured reliably.
2. Certain and exactly measurable.
3. Payable within one year.
14. The acquirer may be required to make a subsequent payment to the seller, as compensation for a reduction in the value of the shares issued for control of the acquiree.
In such cases:
1. An increase in the cost of the combination is recorded.
2. The fair value of the additional payment is offset by an equal reduction in the value, attributed to the shares initially issued.
3. An increase in goodwill is recorded.
15. The acquirer must allocate the cost of a combination, by recording the acquiree’s identifiable:
i) Assets.
ii) Liabilities
iii) Contingent liabilities.
iv) Non-current assets that are as ‘held for sale’.
v) Non-current liabilities that are as ‘held for sale’.
1. i – ii
2. i – iii
3. ii – iii
4. i – iv
5. i – v
16. A building has a cost in the books of the acquiree of $200m. It is being depreciated over 20 years, the length of the lease. After 15 years, you buy the company and fair value the property at $400m. In the consolidated books of account, annual depreciation will be recorded as:
1. $10m.
2. $20m
3. $27m
4. $80m
17. You buy a company. You have paid, have a binding agreement, but some registrations have yet to be completed before you become the legal owner.
1. You have control, for accounting purposes.
2. You do not have control, for accounting purposes.
3. You have partial control, for accounting purposes.
18. Non-controlling (Minority) interest in the acquiree is stated:
1. Zero.
2. The minority’s proportion of the fair value the net assets.
3. The minority’s proportion of the fair value the assets.
19. An acquiree’s restructuring plan, whose execution is conditional upon its being acquired in a combination is:
1. Not a present obligation of the acquiree.
2. A contingent liability.
3. A liability.
20. A tax benefit arising from the acquiree’s tax losses that was not recorded by the acquiree:
1.Qualifies for recognition as an identifiable, if it is probable that the acquirer will have future taxable profits, against which the unrecorded tax benefit can be applied.
1. Will be included in goodwill.
2. Will not be recognised.
21. The acquirer records an in-process research and development project of the acquiree, if the project meets the definition of an intangible asset and its fair value can be measured reliably:
1. As goodwill.
2. As an asset separately from goodwill.
3. Research as an expense, development as an intangible asset.
22. The carrying amount of an item classified as an intangible asset that was acquired in a combination, if that intangible asset does not at that date meet the identifiability criterion in IAS 38, for which the agreement date was before 31 March 2004, is recorded:
1. As goodwill.
2. As an asset separately from goodwill.
3. Research as an expense, development as an intangible asset.
23. After their initial recognition, the acquirer must measure contingent liabilities at:
(1) The amount that would be recorded under IAS 37.
2) The amount initially recorded.
3) The lower of 1 and 2.
4) The higher of 1 and 2.
24. Goodwill acquired in a combination must be:
1. Amortised.
2. Tested for impairment annually.
3. Tested for impairment annually, or more frequently, if required.
25. To eliminate amortisation on previously-recorded goodwill:
1. Credit to the income statement.
2. Eliminate the carrying amount, with a corresponding decrease in goodwill.
3. Eliminate the carrying amount, with a corresponding increase in opening retained earnings.
26. To eliminate previously-recognised negative goodwill:
1. Credit to the income statement.
2. Eliminate the carrying amount, with a corresponding decrease in goodwill.
3. Eliminate the carrying amount, with a corresponding increase in opening retained earnings.
27. When provisional values of net assets need to be amended, the difference goes to:
1. The income statement.
2. Goodwill.
3. Opening retained earnings.
28. When provisional values of net assets need to be amended, the differences will be applied:
1. From the date of acquisition.
2. From the date of amendment.
3. Over the following 3 years.
29. Adjustments to the initial accounting for a combination, after the measurement period is complete, must be recorded:
1. Directly to the income statement.
2. As an error in accordance with IAS 8.
3. As an impairment.
30. A reverse acquisition is:
1. A sale of a business.
2. When a larger firm is bought by a smaller firm.
3. When a private firm buys a listed firm.
31. In a reverse acquisition, consolidated accounts are prepared in the name of:
1.The parent.
2.The subsidiary.
3. Either 1 or 2.
32. In a reverse acquisition, the opening retained earnings are those of:
1.The parent.
2.The subsidiary.
3. Either 1 or 2.
33. In a reverse acquisition, the comparative figures are those of:
1.The parent.
2.The subsidiary.
3. Either 1 or 2.
34. In a reverse acquisition, the minority interests have shares in:
1.The parent.
2.The subsidiary.
3. Either 1 or 2.
35. In a reverse acquisition, the company whose assets are revalued are those of:
1.The parent.
2.The subsidiary.
3. Either 1 or 2.
36. ‘Small’ buys ‘Big’ in a reverse acquisition. Small had 500 shares issued prior to the merger. It then issued 10.000 shares to Big’s owners.
For calculating the EPS, the number of shares for the period prior to the merger is:
1. 500.
2. 10.000
3. 10.500
37. ‘Small’ buys ‘Big’ in a reverse acquisition. Small had 500 shares issued prior to the merger. It then issued 10.000 shares to Big’s owners. Comparative EPS figures for previous figures should use Big’s earnings for the period and divide them by:
1. 500 shares.
2. 10.000 shares.
3. 10.500 shares.
13. Answers to multiple choice questions
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IFRS WORKBOOKS (History and Copyright)
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This is the latest version of the legendary workbooks in Russian and English produced by 3 TACIS projects, sponsored by the European Union (2003-2009) and led by PricewaterhouseCoopers. They have also appeared on the website of the Ministry of Finance of the Russian Federation.
The workbooks cover all standards of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade their knowledge, understanding and skills.
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