Business Combination Materials

IFRS 3 defines business combination is the bringing together of separate entities or businesses into one reporting entity. The result of nearly all business combinations is that one entity, the acquirer, obtains control of one or more other businesses, the acquiree. If an entity obtains control of one or more other entities that are not businesses, the bringing together of those entities is not a business combination. CONTROL is exercised by an entity having power to govern the financial and operating decisions of the entity( entity being controlled) as a whole. IFRS 3 mandates that (a) all business combinations within its scope to be accounted for by applying the purchase method (REQUIREMENT). (b) requires an acquirer to be identified for every business combination within its scope. y The acquirer is the combining entity that obtains control of the other combining entities or businesses. (c) requires an acquirer to measure the cost of a business combination as the aggregate of: the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree; plus any costs directly attributable to the combination. (d) requires an acquirer to recognise separately, at the acquisition date, the acquirees identifiable assets, liabilities and contingent liabilities that satisfy the following recognition criteria at that date, regardless of whether they had been previously recognised in the acquirees financial statements: (i) in the case of an asset other than an intangible asset, it is probable that any associated future economic benefits will flow to the acquirer, and its fair value can be measured reliably; (ii) in the case of a liability other than a contingent liability, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and its fair value can be measured reliably; and (iii)in the case of an intangible asset or a contingent liability, its fair value can be measured reliably. (e) requires the identifiable assets, liabilities and contingent liabilities that satisfy the above recognition criteria to be measured initially by the acquirer at their fair values at the acquisition date, irrespective of the extent of any minority interest. (f) requires goodwill acquired in a business combination to be recognised by the acquirer as an asset from the acquisition date

Goodwill is measured as the difference between:

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the aggregate of (i) the acquisition-date fair value of the consideration transferred, (ii) the amount of any NCI, 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; and

the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed (measured in accordance with IFRS 3).

If the difference above is negative, the resulting gain is recognised as a bargain purchase in profit or loss. [IFRS 3.34]

Or initially measured as the excess of the cost of the business combination over the acquirers interest in the net fair value of the acquirees identifiable assets, liabilities and contingent liabilities recognised in accordance with (d) above. (g) prohibits the amortisation of goodwill acquired in a business combination and instead requires the goodwill to be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, in accordance with IAS 36 Impairment of Assets. (h) requires the acquirer to reassess the identification and measurement of the acquirees identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the business combination if the acquirers interest in the net fair value of the items recognised in accordance with (d) above exceeds the cost of the combination. Any excess remaining after that reassessment must be recognised by the acquirer immediately in profit or loss. (i) requires disclosure of information that enables users of an entitys financial statements to evaluate the nature and financial effect of: (i) business combinations that were effected during the period; (ii) business combinations that were effected after the balance sheet date but before the financial statements are authorised for issue; and (iii)some business combinations that were effected in previous periods. (j) requires disclosure of information that enables users of an entitys financial statements to evaluate changes in the carrying amount of goodwill during the period. A business combination may involve more than one exchange transaction, for example when it occurs in stages by successive share purchases. If so, each exchange transaction shall be treated separately by the acquirer, using the cost of the transaction and fair value information at the date of each exchange transaction, to determine the amount of any goodwill associated with that transaction. This results in a step-by-step comparison of the cost of the individual investments with the acquirers interest in the fair values of the acquirees identifiable assets, liabilities and contingent liabilities at each step. If the initial accounting for a business combination can be determined only provisionally by the end of the period in which the combination is effected because either the fair values to be assigned to the acquirees identifiable assets, liabilities or contingent liabilities or the cost of the combination can be determined only provisionally, the acquirer shall account for the combination using those provisional values. The acquirer shall recognise any adjustments to those provisional values as a result of completing the initial accounting: (a) within twelve months of the acquisition date; and (b) from the acquisition date.

Method of Accounting for Business Combinations Acquisition method. The acquisition method (called the 'purchase method' in the 2004 version of IFRS 3) is used for all business combinations. [IFRS 3.4]

Steps in applying the acquisition method are: [IFRS 3.5] 1. Identification of the 'acquirer' the combining entity that obtains control of the acquiree [IFRS 3.7] 2. Determination of the 'acquisition date' the date on which the acquirer obtains control of the acquiree [IFRS 3.8] 3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI, formerly called minority interest) in the acquiree 4. Recognition and measurement of goodwill or a gain from a bargain purchase Business Combination May result in Either A. Formation of A PARENT- SUBSIDIARY relationship Happens either A shareholder sells his shares to another shareholder in a way that the qcquiring shareholder obtains control of the entity. Between 2001 and 2004, Banco De Oro, once just the 5th largest bank in the Philippines had acquired shares of Equitable PCI bank, the 3rd largest bank in the Philippines. The Banco De Oro started just owning 2.5 % stake of the PCI bank. After series of purchase of shares from different shareholders of the entity had achieved control of PCI. A shareholder or shareholders sells their interest in the entity to non shareholder.

B. DO NOT FORM THE PARENT SUBSIDIARY RELATIONSHIP Reasons for Business Combination

According to BAYSA ( 2009), There are a lot of ways to expand business but business combination is more desirable because 1. COST ADVANTAGE LESSER EXPENSIVE THAN BUYING NEW FACILITIES FOR DEVELOPMENT 2. LOWER RISK- WHEN IT COMES TO DIVERSIFICATION OF AN ENTITY, INTRODUCING A NEW PROUCT OR ENTERING/ VENTURING TO A NEW INDUSTRY IS TOO RISKY WHEN YOU HAVE TO DEVELOPE AND INTRODUCE THAT PRODUCT COMPARED TO BUYING COMPANIES WHOS PRODUCT HAD ALREADY ESTABLISHED ITSELF IN THE MARKET. 3. FEWER OPERATING DELAYS 4. AVOIDANCE OF TAKEOVERS 5. ACQUISITION OF INTANGIBLE ASSETS 6. OTHER REASONS 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. [IFRS 3.41-42] 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 Measurement. Consideration for the acquisition includes the acquisition-date fair value of contingent consideration. Changes to contingent consideration resulting from events after the acquisition date must be recognised in profit or loss. [IFRS 3.58] Acquisition costs. . Costs of issuing debt or equity instruments are accounted for under IAS 32 and IAS 39. All other costs associated with the acquisition must be expensed, including reimbursements to the acquiree for bearing some of the acquisition costs. Examples of costs to be expensed include 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. [IFRS 3.53] Contingent consideration. Contingent consideration must be measured at fair value at the time of the business combination. If the amount of contingent consideration changes as a result of a post-acquisition event (such as meeting an earnings target), accounting for the change in consideration depends on whether the additional consideration is an equity instrument or cash or other assets paid or owed. If it is equity, the original amount is not remeasured. If the additional consideration is cash or other assets paid or owed, the changed amount is recognised in profit or loss. If the amount of consideration changes because of new information about the fair value of the amount of consideration at acquisition date (rather than because of a post-acquisition event) then retrospective restatement is required. [IFRS 3.58] Pre-existing Relationships and Reacquired Rights If the acquirer and acquiree were parties to a pre-existing relationship (for instance, the acquirer had granted the acquiree a right to use its intellectual property), this must must be accounted for separately from the business combination. In most cases, this will lead to the recognition of a gain or loss for the amount of the consideration transferred to the vendor which effectively represents a 'settlement' of the pre-existing relationship. The amount of the gain or loss is measured as follows:
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for pre-existing non-contractual relationships (for example, a lawsuit): by reference to fair value for pre-existing contractual relationships: at the lesser of (a) the favourable/unfavourable contract position and (b) any stated settlement provisions in the contract available to the counterparty to whom the contract is unfavourable. [IFRS 3.B51-53]

However, where the transaction effectively represents a reacquired right, an intangible asset is recognised and measured on the basis of the remaining contractual term of the related contract excluding any renewals. The asset is then subsequently amortised over the remaining contractual term, again excluding any renewals. [IFRS 3.55] Other Issues In addition, IFRS 3 provides guidance on some specific aspects of business combinations including:
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business combinations achieved without the transfer of consideration [IFRS 3.43-44] reverse acquisitions [IFRS 3.B19] identifying intangible assets acquired [IFRS 3.B31-34] the reassessment of the acquiree's contractual arrangements at the acquisition date [IFRS 3.15]

Parent's Disposal of Investment or Acquisition of Additional Investment in Subsidiary Partial disposal of an investment in a subsidiary while control is retained. This is accounted for as an equity transaction with owners, and gain or loss is not recognised. Partial disposal of an investment in a subsidiary that results in loss of control. Loss of control triggers remeasurement of the residual holding to fair value. Any difference between fair value and carrying amount is a gain or loss on the disposal, recognised in profit or loss. Thereafter, apply IAS 28, IAS 31, or IAS 39, as appropriate, to the remaining holding. Acquiring additional shares in the subsidiary after control was obtained. This is accounted for as an equity transaction with owners (like acquisition of 'treasury shares'). Goodwill is not remeasured. Disclosure Disclosure of information about current business combinations 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 during the current reporting period or after the end of the period but before the financial statements are authorised for issue. [IFRS 3.59] Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B64-66]
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name and a description of the acquiree acquisition date percentage of voting equity interests acquired primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree. description of the factors that make up the goodwill recognised qualitative description of the factors that make up the goodwill recognised, such as expected synergies from combining operations, intangible assets that do not qualify for separate recognition acquisition-date fair value of the total consideration transferred and the acquisitiondate fair value of each major class of consideration details of contingent consideration arrangements and indemnification assets details of acquired receivables

y y y y y y

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the amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed details of contingent liabilities recognised total amount of goodwill that is expected to be deductible for tax purposes details of any transactions that are recognised separately from the acquisition of assets and assumption of liabilities in the business combination information about a bargain purchase ('negative goodwill') 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, various disclosures are required details about a business combination achieved in stages information about the acquiree's revenue and profit or loss information about a business combination whose acquisition date is after the end of the reporting period but before the financial statements are authorised for issue

Disclosure of information about adjustments of past business combinations 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. [IFRS 3.61] Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B67]
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details when 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) follow-up information on contingent consideration follow-up information about contingent liabilities recognised in a business combination a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period, with various details shown separately the amount and an explanation of any gain or loss recognised in the current reporting period that both: o (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 o (ii) is of such a size, nature or incidence that disclosure is relevant to understanding the combined entity's financial statements.