ACC 520 - IFRS 3
The acquirer shall recognize goodwill as of the acquisition date measured as the excess of (a) over (b):
(a) The aggregate of: *The consideration transferred, which generally requires the acquisition-date fair value *The amount of any non-controlling interest in the acquiree measured in accordance with the choice granted in IFRS 3 AND *For 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 assets acquired and the liabilities assumed measured in accordance with IFRS 3.
Examples of structures for business combinations include:
*A business becomes a subsidiary of the acquirer *The net assets of a business are legally merged into the acquirer *One entity transfers its net assets to another entity *An entity's owners transfers their equity interests to the owners of another entity *All of the combining entities transfer their net assets, or the owners of those entities transfer their equity interests, to a newly formed entity AND *A group of former owners of one of the combining entities obtains control of the combined entity.
Separate transaction which are not included in applying the acquisition method are:
*Amounts that reimburse the acquiree or its former owners for paying the acquirer's acquisition-related costs. *Amounts that remunerates employees or former owners of the acquiree for future services AND *Amounts in respect of a pre-existing relationship between the acquirer and acquiree or any other arrangements that are separate from the business combinations.
Business combinations measured at fair value are calculated as the sum of the acquisition-date fair value of:
*The assets transferred by the acquirer *The liabilities incurred by the acquirer to former owners of the acquiree AND *The equity interests issued by the acquirer.
An acquirer might obtain control of an acquiree by:
*The issue of legal instruments *The transfer of cash, cash equivalents, or other assets *The assumption of liabilities *A combination of the above OR *A transaction not involving consideration, such as a combination by contract alone
Steps to identifying a business combination:
1. Identify the elements 2. Control? 3. Further criteria satisfied?
What is a bargain purchase?
A business combination in which the net fair value of the identifiable assets acquired and liabilities assumed exceeds the aggregate of the consideration transferred, the non-controlling interests and the fair value of any previously-held equity interest in the acquiree.
What expenditures are excluded in a restructuring provision?
A restructuring provision does not include such costs as: Retraining or relocating continuing staff Marketing OR Investment in new systems and distribution networks.
Business combination
A transaction or other event in which an acquirer obtains control of one or more businesses.
An entity shall recognize acquired deferred tax benefits that is realizes after the business combination as follows:
Acquired deferred tax benefits recognized within the measurement period that result form new information about facts and circumstances that existed at the acquisition date shall be applied to reduce the carrying amount of any goodwill related to that acquisition. If the carrying amount of that goodwill is zero, any remaining deferred tax benefits shall be recognized in profit or loss. *All other acquired deferred tax benefits realized shall be recognized in profit or loss
IFRS does not apply to:
Acquisitions by an investment entity of a subsidiary that is required to be measured at fair value through profit or loss.
Separate transactions
An acquirer is required to identify any amounts that are not part of what the acquirer and the acquiree exchanged in the business combination. As part of the acquisition method, the acquirer recognized only the consideration transferred for the acquiree and the assets acquired and liabilities assumed in the exchange for the acquiree. A transaction entered into by or on behalf of the acquirer or primarily for the benefit of the acquirer or the combined entity, rather than primarily for the benefit of the acquiree before the combination, is likely to be a separate transaction.
What is a reacquired right?
An acquirer may reacquire a right that it had previously granted to the acquiree to use one or more of the acquire's recognized or unrecognized assets. Examples include a right to use the acquirer's trade name under a franchise agreement or a right to use the acquirer's technology under a technology licensing agreement.
Consideration transferred in a business combination - Factors to Consider
An acquirer should consider the following factors, which are neither mutually exclusive not individually conclusive, to determine whether a transaction is part of the exchange for the acquiree or whether the transaction is separate from the business combination.
A provision should be recognized when:
An entity has a present obligation (legal or constructive) as a result of a past event It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation AND A reliable estimate can be made of the amount of the obligation.
Control
An investor control an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee AND has the ability to affect those returns through its power over the investee.
Goodwill
Any future economic benefits that arise from assets that are not capable of being individually identified and separately reconized are recognized as goodwill.
The measurement period begins
At the acquisition date and ends as soon as the acquirer receives the information it was seeking about the facts and circumstances that existed as of the acquisition date or learns that more information is obtainable.
Subsequent measurement and accounting-events after the acquisition date
Changes resulting from events after the acquisition date are not measurement period adjustments. The acquirer accounts for changes in the fair value of contingent consideration that are not measurement period adjustments as follows: Contingent consideration classified as equity shall not be remeasured and its subsequent settlement shall be accounted for within equity
Subsequent measurement and accounting-additional information
Changes that are the result of the acquirer obtaining additional information about facts and circumstances that existed at the acquisition date, and that occur within the measurement period are recognized as measurement period adjustments against the original accounting for the acquisition.
What are the two recognition principle exceptions?
Classification of a lease contract as either an operating lease or a finance lease in accordance with IAS 17 leases AND Classification of a contract as an insurance contract in accordance with IFRS 4 Insurance Contracts.
Recognition exceptions:
Contingent Liabilities Income taxes Employee Benefits Indemnification assets
Recognition and measurement at the acquisition date:
Contingent consideration is recognized as part of the consideration transferred in exchange for the acquiree, measured at its acquisition-date fair value. An obligation to pay contingent consideration that meets the definition of a financial instrument shall be classified as a financial liability or as equity on the basis of the definitions of an equity instrument and a financial liability in IAS 32.
Indicators to consider to determine whether an arrangement for payments to employees or selling shareholders is part of the exchange for the acquiree or a separate transaction.
Continuing employment Duration of continuing employment Level of remuneration Incremental payments to employees Number of shares owned Linkage to the valuation Formula for determining consideration AND Other agreements and issues.
A pre-existing relationship between the acquirer and acquiree may be:
Contractual OR Non-contractual.
Step 2 - Control?
Does the entity obtain control over the transferred elements?
Step 3 - Further criteria satisfied?
Does the transferred set of elements consist of: *Inputs AND *Processes applied to those inputs that have the ability to create outputs
How is a non-contractural relationship measured (such as a lawsuit)?
Fair value
For each business combination, the acquirer shall measure any non-controlling interest in the acquiree at either:
Fair value OR The non-controlling interest's proportionate share of the acquiree's identifiable net assets.
For each business combination, the acquirer shall measure at the acqusition date the components of non-controlling in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation at either:
Fair value OR The present ownership instrument's proportionate share in the recognized amounts of the acquiree's identifiable net assets.
Non-controlling Interests are measured at either:
Fair value OR The present ownership instruments' proportionate share in the recognized amounts of the acquiree's net identifiable assets.
A constructive obligation to restructure arises only when an entity:
Has a detailed formal plan for the restructuring AND Has a raised a valid expectation in those affected that it will carry out the restructuring, by starting to implement that plan or announcing its main features to those affected by it.
Step 1 - Identify the elements
Identify the elements (activities and assets) included in the transferred set
Step 2 NO: Control
If the entity does not obtain control over the transferred elements, the entity should recognize the elements in accordance with one of the following standards: IAS 28 IFRS 11 IAS 39 IFRS 9
Acquisition related 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 recognized in accordance with IAS 32 and IAS 39.
IFRS 3 Objective
International Financial Reporting Standard that specifies the financial reporting by an entity when it undertakes a business combination.
IFRS 3 does not apply to combinations:
Involving the accounting for formation of a joint arrangement in the financial statements of the joint arrangement itself Involving entities or businesses under common control OR Involving the acquisition of an asset or group of assets that does not constitute a business
Contingent consideration
Is usually an obligation of the acquirer to transfer additional assets 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.
What is the Contractual-legal criterion?
Means an asset is identifiable if the asset is not transferable or separable form the acquiree or form other rights and obligations.
What is the Separability Criterion?
Means that an acquired intangible asset is capable of being separate or divided from the acquiree and sold, transferred, licensed, rented or exchanges, either individually or together with a related contract, identifiable asset or liability. Must have evidence of exchange transactions for that type of asset or an asset of a similar type, even if those transactions are infrequent and regardless of whether the acquirer is involved in them.
To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumes must:
Meet the definitions of assets and liabilities in the Conceptual Framework for Financial Reporting at the acquisition date AND Be part of what the acquirer and the acquiree exchanges in the business combination transaction rather than the result of separate transactions.
Business Combinations involve:
Mutual entities and combinations achieved by contract alone
What expenditures are included in a restructuring provision?
Only include the direct expenditures arising from the restructuring that are both *Necessarily entailed by the restructuring AND *Not associated with the ongoing activities of the entity.
How are assets measured?
PP&E - fair value Investment property - provisional fair value Inventories - fair value Trade receivables - fair value Trademark - fair value Long-term loan - fair value Provisions - fair value
Measurement exceptions:
Reacquired rights Share-based payment transactions Assets held for sale Income taxes Employee Benefits Indemnification assets
Consideration transferred in a business combination - Separate Transactions
That are not to be included in applying the acquisition method: *A transaction that settles pre-existing relationships between the acquirer and the acquiree *A transaction that remunerates employees or former owners of the acquiree for future services AND *A transaction that reimburses the acquiree or its former owners for paying the acquirer's acquisition-related cost.
The adjustments to provisional amounts should be recognized as if
The accounting for the business combination had been completed at the acquisition date
How is the acquisition date determined?
The acquire shall identify the acquisition date, which is the date on which it obtains control of the acquiree. This date 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.
The acquisition method accounts for a business combination from the perspective of:
The acquirer - the entity that obtains control of the other business.
The acquirer shall not recognize any assets or liabilities related to an operating lease in which the acquiree is the lessee with the exception of the following two situations:
The acquirer determines that the terms of an operating lease in which the acquiree is the lessee are favorable or unfavorable, relative to market terms. The acquirer recognized an intangible asset of the lease is below market rates and a liability if the lease is above market rates. An identifiable intangible asset may be associated with an operating lease, which may be evidenced by market participant's willingness to pay a price for the lease even if it is at market terms.
Consideration transferred in a business combination - General Principle
The acquirer is required to recognize as part of applying to acquisition method only the consideration transferred for the acquiree, and the assets acquired and liabilities assumed in exchange for the acquiree. Separate transactions are accounted for in accordance with the relevant standards.
Adjustments to unrecognized items
The acquirer shall also recognize additional assets and 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.
How are assets held for sale measured?
The acquirer shall measure an acquired non-current asset that is classified as held for sale at the acquisition date in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations at fair value less costs to sell.
IFRS 3 measurement principle:
The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values:
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 of the items for which the accounting is incomplete
Adjustments to recognized items
The acquirer shall retrospectively adjust the provisional amounts recognized 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 recognized as of that date.
How are income and expenses allocated?
The acquirer's profit and loss shall incorporate the acquiree's profits and losses after the acquisition date by including the acquiree's income and expenses based on the fair value of the acquiree's net assets at the acquisition date.
All business combinations, except for combinations of entities of businesses under common control which are outside the scope of IFRS 3, shall be accounted for by applying
The acquisition method.
Acquisition Date
The date on which the acquirer obtains control of the acquiree. Generally the date on which the acquirer legally transfers the consideration, acquires the assets, and assumes the liabilities of the acquiree-the closing date.
Where an acquire issues share-based payment transactions to replace those of an acquiree, it is necessary to allocate the replacement transactions between:
The element which represents purchase consideration for accrued share rights earned before the acquisition AND The elements which represents compensation for post-acquisition services.
Equity instruments, such as ordinary or preference equity instruments, options or warrants, exchanged for control:
The fair value of equity instruments transferred is measured on a single date, being the date the control passes. No consideration is given to movements in share prices before or after this date. Any costs incurred to issue the equity instruments are excluded from the cost of the combination as such costs reduce the proceeds from the equity issue.
IFRS 3 recognition principle: As of the acquisition date, the acquirer shall recognize, separately from goodwill:
The identifiable assets acquired The liabilities assumed AND Any non-controlling interest in the acquiree
Adjustments may be made in the measurement to the following components
The identifiable assets acquired, liabilities assumed and any NCI in the acquiree The consideration transferred for the acquiree In a business combination achieved in stage, the equity interest in the acquiree previously held by the acquirer, AND The resulting goodwill or gain on a bargain purchase.
How is a contractural relationship measured?
The lesser of (i)The amount by which the contract is favorable or unfavorable from the perspective of the acquirer when compared with terms for market transactions for the same or similar items. AND (ii)the amount of any stated settlement provisions in the contract available to the counterparty to which the contract is unfavorable. If (ii) is less than (i), the difference is included as part of the business combination accounting.
The measurement period is:
The period after the acquisition date during which the acquirer may adjust the provisional amounts recognized for a business combination.
Step 3 - YES: Further criteria satisfied?
The transferred set of elements can be identified as a business
The acquirer subsumes into goodwill when:
The value of an acquired intangible asset that is not identifiable as of the acquisition date Any value attributed to items that do not qualify as assets at the acquisition date
Assets transferred and liabilities incurred in exchange for control of the acquiree:
These assets and liabilities are measured at their fair values at the acquisition date.
Entities shall apply IFRS 3
When accounting for business combinations
After initial recognition, the acquirer shall measure good will in a business combination:
at cost less any accumulated impairment losses
How is a reacquired right measured?
the acquirer shall measure the value of a reacquired right recognized as an intangible asset, separately from goodwill, on the basis of the remaining contractual term of the related contract, regardless of whether market participants would consider potential contractual renewals when measuring fair value.
Step 3 - NO: Further criteria satisfied?
the transferred set of elements cannot be a business
Examples of identifible assets acquired in the business combination:
trademark - meets the contractual-legal criterion sales order backlog - arises from contractual rights licensed customer lists - can be exchanged and there meets the separability criterion favorable relative to market terms operating lease - meets the contractual-legal criterion franchise agreement - represents reacquired right technical expertise - meets the separability criterion
