Business Combination IFRS 3

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A transaction or other event in which an acquirer obtains control of one or more businesses. AKA. True mergers or mergers of equals Method of accounting for business combinations. ACQUISITION METHOD Steps: 1. Identification of the acquirer the combining entity that obtains control of the acquiree Control o power to GOVERN - capacity or ability to accomplish something o To govern the decision-making process through the selection of financial and operating policies. o Control more than 50% o One with Higher FV of Net Assets o BOD

2. Determination of the acquisition date the date on which the acquirer obtains control of the acquiree 3. Recognition and measurement: a. identifiable assets acquired, the liabilities assumed i. measured @ acquisition-date fair values. b. non-controlling interest (NCI, formerly called minority interest) in the acquiree i. measured either: 1. at fair value; or 2. at the non-controlling interests proportionate share of the acquirees identifiable net assets. Example: P pays 800 to purchase 80% of the shares of S. Fair value of 100% of S's identifiable net assets is 600. If P elects to measure noncontrolling interests as their proportionate interest in the net assets of S of 120 (20% x 600), the consolidated financial statements show goodwill of 320 (800 +120 - 600). If P elects to measure noncontrolling interests at fair value and determines that fair value to be 185, then goodwill of 385 is recognised (800 + 185 - 600). The fair value of the 20% noncontrolling interest in S will not necessarily be proportionate to the price paid by P for

its 80%, primarily due to control premium or discount as explained in paragraph B45 of IFRS 3. * Acquired intangible assets. Must always be recognised and measured at fair value. There is no 'reliable measurement' exception. 4. Recognition and measurement of goodwill or a gain from a bargain purchase Goodwill is measured as the difference between: the aggregate of Fair value of the consideration transferred (CASH, NON-CASH, CONTINGENT CONSIDERATION) + NCI + the acquisition-date fair value of the acquirer's previously-held equity interest in the acquire (business combination achieved in stages) TOTAL Less: Fair value (net) identifiable assets acquired and the liabilities assumed GOODWILL If the difference above is negative, the resulting gain is recognised as a bargain purchase in profit or loss. Calculation of goodwill P acquired Q in two stages. In 20X1, P acquired a 30% equity interest for cash consideration of CU32,000 when the fair value of Qs identifiable net assets was CU100,000. In 20X5, P acquired a further 50% equity interest for cash consideration of CU75,000. On the acquisition date, the fair value of Qs identifiable net assets was CU120,000. The fair value of Ps original 30% holding was CU40,000 and the fair value of the 20% non-controlling interest is assessed as CU28,000. Goodwill is calculated, on the alternative bases that P records non-controlling interests (NCI) at their share of net assets, or at fair value, as follows:

Consideration transferred to be measured at fair value. Forms of consideration: 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 entities. Contingent consideration. Part of consideration transferred in measured at fair value at the time of the business combination. Changes in contingent considerations (post acquisition event): depends.. o Additional consideration: EQUITY no remeasurement ASSETS PAID OR OWED change amount ------ P/L o Because of new information about the fair value of the amount of consideration at acquisition date ----- retrospective restatement

Provisional accounting If the initial accounting for a business combination can be determined only provisionally by the end of the first reporting period, account for the combination using provisional values. Adjustments to provisional values within one year relating to facts and circumstances that existed at the acquisition date. [IFRS 3.45] No adjustments after one year except to correct an error in accordance with IAS 8. [IFRS 3.50]

Cost of an acquisition other costs expensed, including reimbursements to the acquiree for bearing some of the acquisition costs. Examples: finder's fees; advisory, legal, accounting, valuation and other professional or consulting fees; and general administrative costs, including the costs of maintaining an internal acquisitions department.

Business combination achieved in stages (step acquisitions) Prior to control being obtained, the investment is accounted for under IAS 28, IAS 31, or IAS 39, as appropriate. On the date that control is obtained, the fair values of the acquired entity's assets and liabilities, including goodwill, are measured (with the option to measure full goodwill or only the acquirer's percentage of goodwill). Any resulting adjustments to previously recognised assets and liabilities are recognised in profit or loss. Thus, attaining control triggers remeasurement.

7/29/2013 5:18:00 PM

7/29/2013 5:18:00 PM