the new revised ifrs 3 business combinations international accounting training webinar – 13 july...
TRANSCRIPT
The New Revised IFRS 3 Business Combinations
International Accounting Training Webinar – 13 July 2010
Presented by Aletta BoshoffTechnical Director, Australia & New Zealand([email protected])
Roadmap for this session
Part A – Background to development of IFRS 3 Revised
Part B - What has changed in IFRS 3 Revised?
Part C - What has changed in IAS 27 Revised Consolidated and Separate Financial Statements?
Part A
Background to the Development of IFRS 3 Revised (IFRS 3R)
What is the core principle of IFRS 3 and IFRS 3 Revised?
An acquirer of a business recognises the assets acquired and liabilities assumed at their
acquisition-date fair values and discloses information that enable users to evaluate the nature and financial effects of the acquisition
IFRS 3 and IFRS 3 Revised requires the application of the acquisition method!
Why a IFRS 3 Revised?
IFRS 3R establishes principles for recognising and measuring:o the identifiable assets acquired, o the liabilities assumed, and o any non-controlling interest in the acquiree
IFRS 3R establishes principles for recognising and measuring goodwill or a gain from a bargain purchase
Heaps of application guidance!
Basic facts about IFRS 3 Revised
Released Jan 2008 by the IASB First jointly IASB/FASB released standard - US
equivalent SFAS 141 Business Combinations Effective for acquisitions on or after annual
reporting periods beginning on or after 1 July 2009 Earlier application allowed provided that IAS 27
(Revised) is applied at the same time
Part B
What has change in IFRS 3 Revised?
Change No 1The scope was broadened
The scope of IFRS 3R was broadened to cover:o business combinations involving only mutual entities,
and business combinations achieved by contract alone
What is not covered within IFRS 3R?o Formation of joint ventureso Acquisition of asset or group of assets that does not
constitute a businesso Combination of entities under common control
Change No 2Broader definition of what constitutes a ‘business
combination’
What is a business combination?o A transaction or other event in which an acquirer
obtains control of one or more businesses o Transactions sometimes referred to as ‘true mergers’ or
‘mergers of equals’ are also business combinations as that term is used in IFRS 3R
Change No 2Broader definition of what constitutes a
‘business combination’
Do the assets acquired and liabilities assumed constitute a
business?
Do the assets acquired and liabilities assumed constitute a
business?
Business combination&
IFRS 3R applicable.
Business combination&
IFRS 3R applicable.
Asset acquisitionAsset acquisition
No
Yes
Acquisition methodAcquisition method
Change No 2Broader definition of what constitutes a
‘business combination’
A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of:o providing a return in the form of dividends, o lower costs, or o other economic benefits
directly to investors or other owners, members or participants
Assets and activities need not be conducted and managed as a business as at acquisition date, so long as they can be in the future
Example ADoes this constitute a business
combination?
IT department is a cost centre to K&K Co a legal firm
IT Outsourced Ltd, specialises in the provision of IT services to legal firms.
K&K Co sells its IT department to IT Outsourced Ltd, consisting of plant and equipment, working capital and staff
Assets and staff transferred to IT Outsourced Ltd is capable of being operated as a business
Example BDoes this constitute a business combination?
Company E’s contains assets of:o Electricity grids $10,000,000o Tracking system $2,500,000o Working capital $500,000
Company A acquires from Company E the electricity grids and the tracking system for $14,000,000.
Consider the relevant industry, certain industries requires relative low inputs of working capital and labour.
Change No 3Limits the scope of reverse acquisitions
The accounting acquiree must meet the definition of a business
A Pty Ltd reversing into a listed cash shell with no business activities, is no longer a reverse acquisition
Change No 4Transaction costs to be expensed
Acquisition-related costs are expensed in the periods in which the costs are incurred and the services are received
Examples:o Finder’s fees, advisory, legal, accounting, valuation and other
professional or consulting fees, costs of internal acquisition department, etc
One exception:o Costs of issuing debt/equity will continue to be offset
against the proceeds in accordance with IAS 32 & IAS 39
Change No 5Introduction of application guidance re
acquisition-date fair values of asset and liabilities
The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values
For example, application guidance in relation to the following:o separate valuation allowances re assets with uncertain cash flows;o assets subject to operating leases in which the acquiree is the
lessor; ando assets that the acquirer intends not to use or to use in a way that is
different from the way other market participants would use them
Change No 6Option to “gross-up” goodwill for non-controlling
interest
The acquirer shall measure any non-controlling interest (formerly known as minority interest) in the acquiree either at:o fair value, oro the NCI’s proportionate share of the acquiree’s
identifiable net assets
Example CMeasurement of non-controlling interest (NCI)
Co Z acquires 80% of Co Y for $100,000 Carrying value of Co Y net assets at time of
acquisition equals $80,000 FV of Co Y net assets at time of acquisition
equals $80,000
Example CMeasurement of non-controlling interest (NCI)
How would we currently (IFRS 3) measure the goodwill and NCI?
Consideration 100,000
FV of assets acquired (80% of 80,000) (64,000)
Goodwill 36,000
Current journal entry?
Dr Net assets 80,000
Dr Goodwil 36,000
Cr Consideration 100,000
Cr NCI (20% of 80,000) 16,000
This is one of the options allowed in IFRS 3R!!!!!!
Example CMeasurement of non-controlling interest (NCI)
Now also another option to measure goodwill and NCI in terms of IFRS 3R
FV of consideration
Plus FV of NCI
Less FV of net identifiable assets
Equals Goodwill
Example CMeasurement of non-controlling interest (NCI)
FV of consideration 100,000
Plus FV of NCI (100,000 x 20/80) 25,000
Less FV of net identifiable assets (80,000)
Goodwill 45,000
Journal entry in terms of this option?
Dr Net assets 80,000
Dr Goodwill 45,000
Cr Consideration 100,000
Cr NCI 25,000
Example CMeasurement of non-controlling interest (NCI)
Current option New option
Consideration 100,000 Consideration 100,000
FV of NCI 25,000
FV of assets acquired (64,000) FV of net identifiable assets (80,000)
Goodwill 36,000 45,000
Dr Net assets 80,000 Dr Net assets 80,000
Dr Goodwill 36,000 Dr Goodwill 45,000
Cr Consideration 100,000 Cr Consideration 100,000
Cr NCI 16,000 Cr NCI 25,000
Change No 7More intangible assets being recognised
Why?o Requirement to be reliably measurable has been
removed
Change No 8 Possible profit implications when obtaining control
of company in which a NCI was held
In a business combination achieved in stages, the acquirer shall:o remeasure its previously held equity interest in the acquiree at its
acquisition-date fair value
and o recognise the resulting gain or loss, if any, in profit or loss
What does this mean?o Possible to generate a profit by obtaining control of an entity previously
held as an investment or an associate
Example DObtaining control of company in which a NCI
was held
In 2000, Co X acquires a 10% holding in Co A for a cost of $1,000
In 2009, Co X acquires the remaining 90% of Co A for $18,000
The fair value of the net tangible assets of Co A at date of acquisition in 2009 was $10,000
Co X accounted for investment in Co A at cost (IAS 27R.38)
Example DObtaining control of company in which a NCI
was held
Consideration consists of:
FV at 2009 of the 10% holding 2,000 *
Cost of 90% holding 18,000
20,000
* 18,000 (Cost of 90% holding) x 10/90 = 2,000
Goodwill is:
Consideration 20,000
Less FV of net assets acquired (10,000)
Goodwill 10,000
What journal entry did we process with the purchase of the original 10% investment in Co A?
Dr Investment in Co A 1,000
Cr Cash 1,000
What journal entry do we need to process with the purchase of the additional 90% investment in Co A?
Dr Net assets @ FVs 10,000
Dr Goodwill 10,000
Cr Cash 18,000
Cr Investment in Co A 1,000
Cr Profit 1,000
Example DObtaining control of company in which a NCI
was held
How can we prove the profit of 1,000?
The profit relates to the initial 10% investment in Co A.
Cost price in 2000 1,000
Fair value in 2009 2,000
Profit 1,000
Example DObtaining control of company in which a NCI
was held
Example EObtaining control of company in which a NCI was
held
In 2000, Co X acquires a 10% holding in Co A for a cost of $1,000
In 2009, Co X acquires the remaining 90% of Co A for $18,000
The fair value of the net tangible assets of Co A at date of acquisition in 2009 was $10,000
Co X accounted for investment in Co A in terms of AASB 139 (IAS 27R.38)
Available-for sale asset (AASB 139)
Example EObtaining control of company in which a NCI
was held
Consideration consists of:
FV at 2009 of the 10% holding 2,000 *
Cost of 90% holding 18,000
20,000• 18,000 (Cost of 90% holding) x 10/90 = 2,000
• Goodwill is:
Consideration 20,000
Less FV of net assets acquired (10,000)
Goodwill 10,000
What journal entry did we process with the purchase of the original 10% investment in Co A?
Dr Investment in Co A 1,000
Cr Cash 1,000
What journal entries did we process in relation to the original 10% investment?
Dr Investment in Co A 1,000
Cr Revaluation reserve 1,000
Example EObtaining control of company in which a NCI
was held
What journal entry do we need to process with the purchase of the additional 90% investment in Co A?
Dr Net assets @ FVs 10,000
Dr Goodwill 10,000
Cr Cash 18,000
Cr Investment in Co A 2,000
Dr Revaluation reserve 1,000
Cr Profit 1,000
(As per IFRS 3.42)
Example EObtaining control of company in which a NCI
was held
Please Note!
No profit implications or additional goodwill with the acquisition of additional holdings in a controlled entity.
What does this mean?
60% Subsidiary + Additional 20% in Subsidiary = No profit or additional goodwill.
Example FAcquisition of additional holdings
Big Ltd has 51% holding in Little Ltd with carrying amount of $51,000
Big Ltd further acquires 29% of Little Ltd for $58,000 Big Ltd accounts for the investment in Little Ltd at
cost
What do we already have in the consolidated financial statements of Big Ltd?
Net assets 100,000 (51,000 x 100/51)
NCI 49,000 (100,000 x 49%)
Example FAcquisition of additional holdings
What journal do we process re the acquisition of an additional 29% interest in this subsidiary?
Dr NCI 29,000 *
Dr Equity 29,000 #
Cr Cash 58 000
* 100,000 x 29% = 29,000
# 58,000 – decrease in NCI (29,000) = 29,000
Change No 9Adjustments to contingent consideration > 12
months after acquisition date = Recognised in P/L
Consideration transferred by the acquirer, including contingent consideration, must be measured and recognised at fair value at the acquisition date
Provisional amounts determined at acquisition date. Provisional accounting applies for 12 months:
o That is, adjustments can be made if it relates to a condition that existed at acquisition date.
Subsequent adjustment 12 months after acquisition date:o directly to P/L, ando no adjustment to goodwill.
Example GContingent consideration
Co A paid $150 to acquire Co B Fair value of the net assets of Co B is $100 If Co B meets profit targets over a three year
period, Company A will pay another $50 at the end of year 3
The likelihood of Company B meeting the profit targets is 75%
Discount rate is 10%
Example GContingent consideration
Calculation of the PV of the contingent consideration
PV of contingent consideration
= $50*75%/1.10^3 = $28
Initial journal entry (At date of acquisition)
Dr Net assets 100
Dr Goodwill 78
Cr Cash 150
Cr Contingent liability 28
Example GContingent consideration
Journal entry at end of Year 2
The balance of the liability is $50*0.75/1.1 = $34
Now, the likelihood of Company B meeting its profit target is 25%. FV of the liability = $50*0.25/1.1 = $11
Current IFRS 3 IFRS 3 (Revised)
Dr Liability 23Cr Goodwill 23
Dr Liability 23Cr Profit or loss 23
Change No 10Income Taxes
Treatment of deferred tax benefits realised
Within the (12 months) measurement period
Reduces goodwill
After the (12 months) measurement period
Profit or loss
Example HMeasurement period - Income tax
On 1/1/10 ABC Ltd acquired Z Ltd for $1,000,000 Z Ltd has $500,000 of tax losses On acquisition date, it is less than probable that
the tax losses will be utilised therefore no DTA was booked
On 1/1/12 it is now probable that the losses will be utilised
Example HMeasurement period - Income tax
IFRS 3 (Revised) IFRS 3 (Current Version)
1/1/12
Dr DTA 150,000Cr ITE 150,000
1/1/12
Dr DTA 150,000Cr ITE 150,000
Dr ITE 150,000Cr Goodwill 150,000
Change No 11Indemnification Assets
Indemnification assets are recognised at fair value on the same basis as the related liability for the indemnified item
Examples:o Uncertain tax positionso Environmental liabilitieso Legal matters
Example IMeasurement period - Indemnification assets
Company A acquired Company B Company B is currently undergoing a tax audit.
Original owners of Company B has agreed to reimburse Company A for any future tax expense incurred as a result of the current tax audit
It has been estimated that there is a 40% chance that Company A will have to pay $500,000 as a result of the tax audit in 3 years time
Discount rate is 10%
Example IMeasurement period - Indemnification assets
Dr Indemnification asset 150,263
Cr Contingent liability 150,263
(40% X 500,000)/1.1^3
Example IMeasurement period - Indemnification assets
At the end of year 2 there is only 30% chance.
DR P&L $45,455
CR Indemnification asset $45,455
[(40% x 500,000/1.1) – (30% x 500,000/1.1)]
DR Contingent liability $45,455
CR P&L $45,455
[(40% x 500,000/1.1) – (30% x 500,000/1.1)]
Change No 12 Determining what is part of the business
combination transaction
The following are examples of separate transactions that are not to be included in applying the acquisition method:
a transaction that in effect settles pre-existing relationships between the acquirer and 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 costs
Part C
What has changed in IAS 27 Revised?
Change No 1No profit implications when change in interest
without losing control
Requirements were added to specify that changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control must be accounted for as equity transactions
Previous IAS 27 did not have requirements for such transactions
Example JSell down of subsidiary
Big Ltd has a 60% investment in Little Ltd with carrying amount of $60,000.
Big Ltd sells 9% of Little Ltd for $50,000, therefore reducing its holding in Little Ltd to 51% while retaining control.
What do we already have in the consolidated financial statements of Big Ltd?
Net assets 100,000 (60,000 x 100/60)
NCI 40,000 (100,000 x 40%)
Example JSell down of subsidiary
What journal do we process re the sale of 9% interest in this subsidiary?
Dr Cash 50,000
Cr NCI 9,000 *
Cr Equity - Parent 41,000 #
* 100,000 x 9% = 9,000
# 50,000 – increase in NCI (9,000) = 41,000
Change No 2Profit implications when change in interest that
results in losing control
Requirements were added to specify how an entity measures any gain or loss arising on the loss of control of a subsidiary
Any such gain or loss is recognised in P/L
Any investment retained in the former subsidiary is measured at its fair value at the date when control is lost
Example KSell down of subsidiary
Big Ltd has a 60% investment in Little Ltd with carrying amount of $60,000
Big Ltd sells 11% of Little Ltd for $50,000, therefore reducing its holding in Little Ltd to 49%
Big Ltd no longer has control
Example KSell down of subsidiary
60% to 49%IAS 27 (As Amended 2008) IAS 27 Current
Journal Entries
DR Proceeds $50,000
DR Associate $222,727
CR Net Assets in Sub $60,000
CR P&L $212,727
DR Proceeds $50,000
DR Associate $49,000
CR Net assets in Sub $60,000
CR P& L $39,000
P&L Impact
$212,727 $39,000
Remember?
Subsidiary to Subsidiary Subsidiary to AssociateChange in level of ownership
60%-51% 60% - 49%
Journal entries
Example X Example Y
P&L Impact
Nil $212,727
What about the sale of an associate?
Profit or loss =
Fair value of the retained investment
+ proceeds from disposal
– carrying amount of the investment
Example LSell down of associate
Big Ltd has a 40% investment in Little Ltd with carrying amount of $100,000.
The fair value of Little Ltd is $800,000 (100%). Selling price = Fair value.
Example LSell down of associate
Associate to Associate Associate to AFSChange in level of ownership
40% - 20% 40% - 19%
Journal entries
DR Cash $160,000
($800,000*20%)
CR Associate $50,000
(20%/40%*$100,000)
CR P&L $110,000
DR Cash $168,000
($800,000*21%)
DR AFS $152,000
($800,000*19%)
CR Associate $100,000
CR P&L $220,000
P&L Impact $110,000 $220,000
Change No 3Unlimited allocation of losses to NCI
An entity must attribute total comprehensive income to the owners of the parent and to the
NCI even if this results in the NCI having a deficit balance
Comments and/or Questions
The End
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