IFRS 3 – Business combinations UFE Study Guide

Business Combinations (IFRS 3)
Last Updated: December 7, 2013

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This IFRS applies when one business merges with or acquires another. This IFRS does not apply to joint ventures or acquisition of assets which do not constitute a business under common control.

Acquisition MethodBusiness combinations should be accounted for using the acquisition method.

1. Identify the acquirer

  • In each merger/acquisition, an acquirer must be identified.
    • Big picture: who has control/power over the other (voting rights, board of directors)
    • Exposure, or rights, to returns from the acquisition (exposure to both +/- returns)
    • Ability to use power over the acquisition to affect the amount of the returns

2. Determine the acquisition date – the date on which legal control is obtained unless a written agreement provides that control is obtained the day before the closing date.

3. Measure and recognize the assets acquired and liabilities assumed as well as any non-controlling interest in the acquiree that may exist

  • Assets acquired and liabilities assumed must meet the criteria for assets and liabilities.
  • Must be part of the same transaction (the merger/acquisition) and not as part of different transactions which may exist separately from a previous business relationship.
  • The acquisition may result in recognizing assets not previously recognized such as intangibles.
  • The assets acquired and liabilities assumed should be measured at their acquisition date fair values. With these exceptions:
    • Contingent liabilities – must be recognized if it is a present obligation which arises from a past event and its fair value can be measured reliably even if probability of occurrence is low. Subsequent accounting measures as the lesser of IAS 37 and the original amount.
    • Income taxes – In accordance with IAS 12 Income Taxes
    • Employee benefits – In accordance with IAS 19 Employee Benefits
    • Indemnification assets, Reacquired rights  – Not likely to be tested in my opinion
    • Share-based payment transactions – in accordance with IFRS 2
    • Assets held for sale – in accordance with IFRS 5

4. Recognize the difference as goodwill or a gain from a bargain purchase.

The purchase price must first be established and then goodwill is the excess of (a) over (b):

a)      Acquisition-date fair value of consideration transferred.

  • If not 100% acquisition then [acquisition-date FV] / [% acquired] in order to imply a 100% acquisition.

b)      The net acquisition-date amounts of assets acquired and liabilities assumed

Goodwill = FV of Consideration Transferred – The 100% Fair Value of acquired assets & liabilities.

Acquisition-related costs:

  • Should be expensed with the exception of costs to issue debt or equity securities which should be recognized in accordance with IAS 32 and IAS 39.

Bargain Purchase:

  • In cases where the amount in (b) exceeds the amount in (a) above then it is a bargain purchase which means that the acquirer is purchasing the net assets of the acquiree at a bargain. IFRS requires the reassessment of the amounts in (b) and if everything is correct post-reassessment then the gain is recognized in the income of the acquirer.

Business Combination in Stages:

  • When an acquisition occurs in stages, remeasure the previously acquired equity interest at its acquisition-date fair value and recognize the resulting gain or loss into income.

Measurement Period:

  • If the accounting for a business combination is not complete by the end of the reporting period, provisional amounts must be used for incomplete items on the financial statements.
  • During the measurement period which is a maximum of one-year, the acquirer shall retrospectively adjust the provisional amounts to reflect new information.

Disclosure

Disclosure requirements are considerable but unlikely to be tested extensively on the UFE.

Two main objectives:

1. Information that enables users to evaluate the nature and the financial effects of the business combination during the current period or after the end of the reporting period but before the financial statements are authorized.

  • Name and description of acquiree, acquisition date, percentage acquired, reasons, etc.

2. Information that enables users to evaluate the financial effects of adjustments recognized in the current period related to combinations that occurred in the current or previous period.

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