IFRS 3 Business combinations. Cases. Cases Véronique Weets

Transcription

1 Cases IFRS 3 Business combinations Cases Véronique Weets Instituut van de Bedrijfsrevisoren 1

2 Cases TABLE OF CONTENT Table of content... 2 IFRS 3 Business combinations... 3 Identifying the acquirer... 3 Goodwill... 6 Measurement period... 7 Comprehensive case... 8 Contingent consideration... 9 Bargain purchases Business combinations achieved in stages Determining what is part of the business combination transaction Restructurings and liabilities Employee benefits Pre existing relationships Contingent payments to employees or selling shareholders Share based payments Intangible assets Reverse acquisitions Income taxes Impairment of goodwill Instituut van de Bedrijfsrevisoren 2

3 Identifying the acquirer IFRS 3 BUSINESS COMBINATIONS IDENTIFYING THE ACQUIRER 1. Mocas owns three subsidiaries that are all independent entities; Hara, Neb and Luc. Mocas owns the following percentage of each subsidiary: Hara 80%, Neb 60%, Luc 55%. Neb purchases Luc. What IFRS governs the accounting treatment of Neb s acquisition of Luc? 2. Entity A owns 40 shares of the 100 shares of D. The remaining shares of D are owned by B (55 shares) and C (5shares). D offers its shareholders the right to sell in their shares at fair value. Only B accepts the offer and sells 30 shares. Does the transaction represents a business combination? 3. An entity may decide to outsource its information technology or call centre operations to a third party. Before the outsourcing, these functions generally will have been operated as a cost centre for the business as a whole, rather than as a business per se. Generally, the staff, plant and equipment and other working capital of the outsourced department are transferred to the third party, and a contractual arrangement entered into with the third party for the provision of the service to the outsourcing entity on an ongoing basis. Does the transaction represents a business combination? 4. A public limited Entity, owns 50% of B and 49% of C. There is an agreement with the shareholders of C that the group will control the board of directors (Wiley workbook and guide, 2006, pg 338). Should C be considered to be a subsidiary in the group accounts? 5. Entity A wholly owns the share capital of Entity B, Entity C and Entity D. In turn Entities B,C and D each own 17% of Entity E s share capital (PWC, chapter 24). Does A control E? 6. Entity A owns 45% of the voting shares of Entity B. Entity A also has an agreement with other shareholders that they will always vote a further 20% holding in the same way as Entity A (PWC, chapter 24). Does A control B? 7. Three Entities A, B and C invest in Entity D to manufacture footballs. Entity A has considerable experience in manufacturing footballs and has developed new technology to improve their production. Entity B and Entity C are both banks that have previously financed Entity A s operations. Entity A will contribute technology and know how to Entity D, whilst Entity B and Entity C will contribute finance. The share ownership will be Entity A: 40%, Entity B: 30% and Entity C/ 30%. Each Entity will appoint directors in proportion to their ownership percentage. An agreement between the shareholders states that all directors will be non executive except for the managing director and the finance director, both of whom will be appointed by Entity A in recognition of its expertise in the area of football manufacture. The shareholder agreement delegates to Entity A s managing director and its finance director the power to set Entity D s operating policies and operating budget. However, requests for additional financing must be considered by the board (PWC, chapter 24). Which entity controls D? Instituut van de Bedrijfsrevisoren 3

4 Identifying the acquirer 8. Entity A controls the composition of Entity B s board. The board of directors of Entity B has seven members, four appointed by Entity A and three appointed by Entity C. One of the directors of Entity A rarely attends board meetings and strategic decisions are often taken by the majority vote of the remaining board members. That is, three from Entity A and three from Entity C (PWC, chapter 24). Which entity has to consolidate B? 9. Entity A owns 45% of the shares in Entity B, but controls the composition of its board of directors by having the power to appoint or remove the majority of Entity B s directors (PWC, chapter 24). Should A consolidate B? 10. Entity A owns 50% of the voting shares of Entity B. The board of directors consist of eight members. Entity A appoints four directors and two other investors appoint two directors each. One of Entity A s nominated directors always serves as chairman of Entity B s board and has the casting vote at board meetings (PWC, chapter 24). Does A control B? 11. Entity A and Entity B own 80% and 20% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity C. Entity A sells one half of its interest to Entity D and buys call options from Entity D that are exercisable at any time at a premium to the market price on issue. If the options are exercised they would give Entity A its original 80% ownership interest and equivalent voting rights. The exercise price is not deliberately set so high that the possibility of exercise is remote (IAS 27 IG8). Which entity controls C? 12. Entity A,B and C own 40%, 30% and 30% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entity A also owns call options that are exercisable at any time at the fair value of the underlying shares and if exercised would give it an additional 20% of the voting rights in Entity D and reduce Entity B s and Entity C s interest to 20% each. If the options are exercised Entity A would have control over more than 50% of the voting power of Entity D (IAS 27, IG 8). Which entity has to consolidate D? 13. Entities A, B and C own 25%, 35% and 40% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entities B and C also have share warrants that are exercisable at any time at a fixed price and provide potential voting rights. Entity A has a call option to purchase these share warrants at any time for a nominal amount, and, if the call option is exercised, would give Entity A the potential to increase its ownership interest, and thereby its voting rights, in Entity D to 51% (and dilute Entity B s interest to 23% and Entity C s interest to 26%) (IAS 27, IG 8). Which entity has to consolidate D? 14. Entities A, B and C each own 33% of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entities A,B and C each have the right to appoint two directors to the board of directors of Entity D. Entity A also owns call options that are exercisable at a fixed price (that is not excessive) at any time and if exercised would give it all the voting rights in Entity D. Entity A s management does not intend to exercise the call options even if Entities B and C do not vote in the same manner as Entity A (IAS 27, IG 8). Does entity A control entity D? Instituut van de Bedrijfsrevisoren 4

5 Identifying the acquirer 15. Entities A and B own 55% and 45% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity C. Entity B also holds debt instruments that are convertible into ordinary shares of Entity C. The debt can be converted by paying a substantial premium, in comparison to Entity B s net assets, at any time and if converted would require Entity B to borrow additional funds to make the payment. If converted, Entity B would receive 70% of the voting rights and Entity A s interest would reduce to 30%. Although the debt instruments are convertible at a substantial price, the price is not so high that the possibility of conversion is remote (IAS 27, IG 8). Which entity has to consolidate entity C? 16. Additional guidance in marginal cases Factor Acquirer is Consideration primarily cash, other assets or incurring liabilities Consideration primarily in equity interests Relative size More than two combining entities New entity formed which issues equity interests New entity formed which transfers cash, other assets or incurs liabilities Relative voting rights in the combined entity after the combination No majority interest in the combined entity, but single large minority interest Composition of the governing body of the combined entity Terms of the exchange of equity interests Instituut van de Bedrijfsrevisoren 5

6 Goodwill GOODWILL 1. Consider the following information (ACCA, pg 2308) At 31 December 20X5 Parent Subsidiary Cu CU Non current assets Tangibles Cost of investment in Subsidiary Net current assets Issued capital Retained earnings Parent bought 100% of Subsidiary on 31 December 20X5 Subsidiary's reserves are CU 100 at the date of acquisition Calculate the goodwill and prepare the consolidated balance sheet at 31 December 20X5 2. Mocas purchased 75% of the capital of Haraf for CU on 1 July 20X0. at this date the equity of Haraf was: CU Share capital General reserve Retained earnings At this date Haraf had not recorded any goodwill, and all identifiable assets and liabilities were recorded at fair value except for the following cases: Carrying amount Fair value CU CU Inventory Plant (cost CU ) Land The tax rate is 30%. Calculate the goodwill and determine the journal entries related to the business combination a. If the non controlling interest is measured at its fair value of b. If the non controlling interest is measured at its proportionate share in the net assets of Haraf Instituut van de Bedrijfsrevisoren 6

7 Measurement period MEASUREMENT PERIOD 1. Maltis acquired the net assets of BodySculpt on 31 December 20X5. The cost of acquisition was CU4.2 million and goodwill on acquisition was CU0.6 million. While preparing the financial statements for the combined Maltis at the end of 20X6 the following items were identified: During 20X6 Maltis discovered that BodySculpt owned land that had been acquired many years ago but which had not been separately identified and recorded at acquisition. Maltis estimated that the fair value of the property as at the date of acquisition was CU BodySculpt holds a significant investment in Pool Side. Due to a change in economic conditions affecting Pool Side s industry in the latter half of 20X6, the recoverable amount of the investment was estimated to have fallen below its carrying amount by CU How should Maltis treat these two items in its consolidated financial statements at 31 December 20X6? 2. AC acquires TC on 30 September 30 20X7. AC seeks an independent appraisal for an item of property, plant, and equipment acquired in the combination, and the appraisal was not completed by the time AC issued its financial statements for the year ending 31 December 20X7. In its 20X7 annual financial statements, AC recognized a provisional fair value for the asset of CU At the acquisition date, the item of property, plant, and equipment had a remaining useful life of five years. Five months after the acquisition date, AC received the independent appraisal, which estimated the asset s acquisition date fair value as CU How should AC report this transaction? Instituut van de Bedrijfsrevisoren 7

8 Comprehensive case COMPREHENSIVE CASE Rotorua Ltd and Waikato Ltd are two family owned flax producing companies in New Zealand. Rotorua Ltd is owned by the Wood family, while the Bradbury family owns Waikato Ltd. The Wood family has one daughter, and she is engaged to be married to the son of the Bradbury family. Because the daughter is currently managing Waikato Ltd, it is proposed that she be allowed to manage both companies after the wedding. As a result, it is agreed by the two families that Rotorua Ltd should take over the net assets of Waikato Ltd. The balance sheet of Waikato Ltd immediately prior to the takeover is as follows: Carrying amount CU Fair value CU Cash Accounts Receivable Land Buildings (net) Farm equipment (net) Irrigation equipment (net) Vehicles (net) Accounts payable Loan Maori Bank Share capital Retained earnings The takeover agreement specified the following details: 1. Rotorua Lts is to acquire all assets of Waikato Ltd except for cash, and one of the vehicles (having a carrying amount of CU and a fair value of ), and assume all the liabilities except for the loan from the Maori Bank. Waikato Ltd is then to go into liquidation. 2. Rotorua Ltd is to supply sufficient cash to enable the debt to the Maori Bank to be paid off and to cover the liquidation costs of CU It will also give CU to be distributed to Mr and Mrs Bradbury to assist in paying the wedding costs. 3. Rotorya Ltd is also to give a piece of its own prime land to Waikato Ltd to be distributed to Mr and Mrs Bradbury, this eventually being available to be given to any off spring of the forthcoming marriage. The piece of land in question has a carrying amount of CU and a fair value of CU Rotorua Ltd is to issue shares, these having a fair value of s14 per share, to be distributed via Waikato Ltd to the soon to be married son of Mr and Mrs Bradbury, who is currently a shareholder in Waikato Ltd. 5. The takeover proceeded as per the agreement with Rotorua Ltd incurring incidental acquisition costs of CU25 000, while there were Cu share issue costs. Prepare the acquisition analysis and the journal entries to record the acquisition of Waikato Ltd in the records of Rotorua Ltd in accordance with the present version of IFRS 3 Instituut van de Bedrijfsrevisoren 8

9 Contingent consideration CONTINGENT CONSIDERATION Entity A acquires 85% of XYZ on 1 July 20X5 on the following terms Issuance of shares of Entity A equity shares to XYZ shareholders. At the date of exchange, which is also the acquisition date, the market value of Entity A s shares is 250 per share. Entity A s share price did not fluctuate unduly before or after the issuance. Par value of the stock is 80 per share. Issuance costs related to the stock total Entity A also issues notes payable to the XYZ shareholders on 1 July 20X5. XYZ shareholders will receive a total of CU one year from the date of acquisition. Entity A s incremental borrowing rate is 12 %. The present value factor for 12% is The terms also require that at the end of six months after the acquisition, Entity A will pay in cash to each XYZ shareholder an additional amount in relation to the number of shares of Entity A stock that they received if the following conditions are met: o o If XYZ s net profit is between 20% and 30% higher than the net profit earned during the six months prior to acquisition, the shareholder is entitled to a cash payment of 50 for each share received in Entity A. If XYZ s net profit is more than 30% higher than the net profit earned during the six months prior to acquisition, the shareholder is entitled to a cash payment of 70 for each share received in Entity A. At the date of acquisition, Entity A estimated that the probability of having an increase in net profit of more than 20% is 80%, and the probability for an increase of more than 30% is 20%. Entity A also incurred the following costs: CU Legal services for review and preparation of purchase documents Accounting services to assist in evaluating and recording the acquisition Registration and business transfer fees to government offices Appraisal services for determination of fair value on certain assets Costs to remove XYZ s old signs and install new signs a. Based on the information shown above, calculate the initial cost of the acquisition that will be recorded on Entity A s accounting records. b. At 31 December 20X5 Entity A established that XYZ s net profit for the six months following acquisition was 32% higher than the net profit earned during the six months previous to the acquisition. Give the appropriate accounting entry. Instituut van de Bedrijfsrevisoren 9

10 Bargain purchases BARGAIN PURCHASES On 1 January 20X5, AC acquires 80 % of the equity interests of TC, a private entity, in exchange for cash of CU150. Because they needed to dispose of their investments in TC by a specified date, the former owners of TC did not have sufficient time to market TC to multiple potential buyers. The management of AC initially measures the separately recognizable identifiable assets acquired and the liabilities assumed as of the acquisition date in accordance with the requirements of IFRS 3. The identifiable assets are measured at CU250, and the liabilities assumed are measured at CU50. AC engages an independent consultant who determines that the fair value of the 20 % non controlling interest in TC is CU42. The fair value of TC s identifiable net assets (CU200, calculated as CU250 CU50) exceeds the fair value of the consideration transferred plus the fair value of the non controlling interest in TC. Therefore, AC reviews the procedures it used to identify and measure the assets acquired and liabilities assumed and to measure the fair value of both the non controlling interest in TC and the consideration transferred. After that review, AC decides that the procedures and resulting measures were appropriate. a. How should AC measure the gain on its purchase of the 80 % interest? b. How should AC record its acquisition of TC in its consolidated financial statements? c. If the acquirer chose to measure the non controlling interest in TC on the basis of its proportionate interest in the identifiable net assets of the acquiree, how much would the gain on the bargain purchase be? Instituut van de Bedrijfsrevisoren 10

11 Business combinations achieved in stages BUSINESS COMBINATIONS ACHIEVED IN STAGES 1. A acquired 75% controlling interest in B in two stages In 20X1, A acquired a 15% equity interest for cash consideration of A classified the interest as available for sale under IAS 39. From 20X1 to the end of 20X5, A reported fair value increases of in other comprehensive income. In 20X6, A acquired a further 60% equity interest for cash consideration of A identified net assets of B with a fair value of A elected to measure non controlling interests at their share of net assets. On the date of acquisition, the previously held 15% interest had a fair value of Give the appropriate journal entries 2. C acquired a 75% controlling interest in D in two stages In 20X1, C acquired a 40% equity interest for cash consideration of C classified the interest as an associate under IAS 28. At the date that C acquired its interest, the fair value of D s identifiable net assets was From 20X1 to 20X, C equity accounted for its share of undistributed profits totaling 5000 and included its share of an IAS 16 revaluation gain of in other comprehensive income. Therefore, in 20X6, the carrying amount of C s interest in D was In 20X6, C acquired a further 35% equity interest for cash consideration of C identified net assets of D with a fair value of C elected to measure non controlling interests at fair value of On the date of acquisition, the previously held 40% interest had a fair value of Give the appropriate journal entries (ignore any profits earned prior to the acquisition) 3. a) In 20X1, A acquired a 75% equity interest in B for cash consideration of B s identifiable net assets at fair value were The fair value of the 25% non controlling equity interest (NCI) was Calculate the goodwill for the two options of measuring the NCI b) In the subsequent years, B increased net assets by to This is reflected in an increase of the carrying amount within equity attributed to non controlling interests with In 20X6, A then acquired the 25% equity interest held by non controlling interests for cash consideration of Give the appropriate accounting entries for both alternatives 4. In 20X1, A acquired a 100% equity interest in B for cash consideration of B s identifiable net assets at fair value were Goodwill of was identified and recognized. In subsequent years, B increased net assets by to This is reflected in equity attributable to the parent. A then disposed 30% of its equity interest to non controlling interests for NCI is measured at % of net assets. Give the appropriate accounting entry 5. In 20X1, A acquired a 100% interest in B for cash consideration of B s identifiable net assets at fair value were Goodwill of was identified and recognized. In the subsequent years, B increased net assets by to Of this, was reported in profit or loss and 5000, relating to fair value movements on an available for sale financial asset, was reported within other comprehensive income. A then disposed of 75% of its equity interest for cash consideration of The resulting 25% equity interest is classified as an associate under IAS 28 and has a fair value of Give the appropriate accounting entry Instituut van de Bedrijfsrevisoren 11

12 Determining what is part of the business combination DETERMINING WHAT IS PART OF THE BUSINESS COMBINATION TRANSACTION RESTRUCTURINGS AND LIABILITIES 1. Company A acquires company B, effective 1 March 20X5. At the date of acquisition, company A intends to close a division of company B. As at the date of acquisition, management has developed and the board has approved the main features of the restructuring plan and, based on available information, best estimates of the costs have been made. As at the date of acquisition, a public announcement of company A s intentions has been made and relevant parties have been informed of the planned closure. Within in a week of the acquisition being effected, management commences the process of informing unions, lessors, institutional investors and other key shareholders of the broad characteristics of its restructuring program. A detailed plan for the restructuring is developed within three months and implemented soon thereafter. Should company A create a provision for restructuring as part of its acquisition accounting entries? How would your answer change if all the circumstances are the same as those above except that company A decided that, instead of closing a division of company B, it would close down one of its own facilities? 2. On 9 June 2008, Diageo completed the acquisition of Ketel One Worldwide BV (KOW), a 50:50 company based in the Netherlands, which owns the exclusive and perpetual global rights to market, sell and distribute Ketel One vodka products. Diageo paid 471 million for a 50% equity stake in KOW. Additional costs relating to the acquisition of 2 million are expected to be incurred in the year ending 30 June Diageo controls the operating and financial policies of the company and consolidates 100% of KOW with a 50% minority interest. The Nolet Group has an option to sell their 50% equity stake in the company to Diageo for $900 million ( 452 million) plus interest from 9 June 2011 to 9 June If the Nolet Group exercises this option but Diageo chooses not to buy their stake, Diageo will pay $100 million ( 50 million) and the Nolet Group may then pursue a sale of their stake to a third party, subject to rights of first offer and last refusal on Diageo s part. Fair value adjustments include the recognition of worldwide distribution rights into perpetuity of Ketel One vodka products of 911 million, the establishment of a deferred tax liability of 116 million and the creation of a financial liability at fair value of 32 million for the potential amount payable to the Nolet Group. Goodwill of 166 million arose on the acquisition (Diageo, annual report 2008). Instituut van de Bedrijfsrevisoren 12

13 Determining what is part of the business combination Book value million Fair value adjustments million Fair value million Brands Intangible assets Property, plant and equipment 2 2 Working capital Deferred taxation (115) (115) Financial liability (32)* (32) Bank overdrafts Net identifiable assets and liabilities Goodwill arising on acquisition 174 Minority interests (456) Consideration payable 527 Satisfied by: Cash consideration paid 524 Contingent/deferred consideration payable/(receivable) Cash consideration paid for 524 investments in subsidiaries Cash consideration payable for 62 investments in associates Deferred consideration payable for (11) investments in associates Bank overdrafts acquired Prior year purchase consideration adjustment Net cash outflow 575 *A third party has established a fair value for the potential liability that represents the present value of the potential penalty. Comment on the accounting for the fair value of the assets acquired and liabilities and contingent liabilities assumed in the KOW Deal (remark: the table also contains information on other business combinations). Instituut van de Bedrijfsrevisoren 13

14 Determining what is part of the business combination EMPLOYEE BENEFITS TC appointed a candidate as its new CEO under a ten year contract. The contract required TC to pay the candidate 5 million if TC is acquired before the contract expires. AC acquires TC eight years later. The CEO was still employed at the acquisition date and will receive the additional payment under the existing contract. Should company A create a provision for this payment as part of its acquisition accounting entries? Would your answer change if TC entered into the agreement with the CEO at the suggestion of AC during the negotiations for the business combination, and the payment is contingent on the CEO remaining in employment for 3 years following a successful acquisition? Instituut van de Bedrijfsrevisoren 14

15 Determining what is part of the business combination PRE EXISTING RELATIONSHIPS AC purchases electronic components from TC under a five year supply contract at fixed rates. Currently, the fixed rates are higher than the rates at which AC could purchase similar electronic components from another supplier. The supply contract allows AC to terminate the contract before the end of the initial five year term but only by paying a 6 million penalty. With three years remaining under the supply contract, AC pays 50 million to acquire TC, which is the fair value of TC based on what other market participants would be willing to pay. Included in the total fair value of TC is 8 million related to the fair value of the supply contract with AC. The 8 million represents a 3 million component that is at market because the pricing is comparable to pricing for current market transactions for the same or similar items (selling effort, customer relationships and so on) and a 5 million component for pricing that is unfavorable to AC because it exceeds the price of current market transactions for similar items.tc has no other identifiable assets or liabilities related to the supply contract before the business combination. What amount will be included in the consideration transferred to TC for the acquisition? Instituut van de Bedrijfsrevisoren 15

16 Determining what is part of the business combination CONTINGENT PAYMENTS TO EMPLOYEES OR SELLING SHAREHOLDERS Determine for the following features in contingent payment transactions entered into by the acquirer to remunerate employees or former owners of the acquiree for future services whether they give an indication that the cost of the contingent payment is part of the business combination transaction or whether they give an indication that the cost of the contingent payment should be treated as post combination remuneration cost. Contingent payment is automatically forfeited if employment terminates Period of required employment is longer than period for contingent payment Other remuneration is at reasonable level as compared with other key personnel of the combined entity Selling shareholders who do not become employees receive lower contingent payments per share than the other selling shareholders Selling shareholders who continue as key employees owned only a small number of shares in the acquiree and all selling shareholders receive the same amount of contingent consideration on a per share basis Selling shareholders who owned substantially all of the shares in the acquiree continue as key employees Initial consideration transferred at the acquisition date is based on the low end of a range established in the valuation of the acquiree and the contingent formula relates to that valuation approach Contingent payment formula is consistent with prior profit sharing arrangements Contingent payment is a specified percentage of earnings Contingent payment is determined on the basis of a multiple of earnings In connection with the acquisition and the contingent payment arrangement, the acquirer entered into a property lease arrangement with a significant selling shareholder. The lease payments are significantly below market. Part of the business combination transaction Post combination remuneration Instituut van de Bedrijfsrevisoren 16

17 Determining what is part of the business combination SHARE BASED PAYMENTS 1. AC acquires TC. AC issues replacement awards of CU110 (market based measure) at the acquisition date for TC awards of CU100 (market based measure) at the acquisition date. No post combination services are required for the replacement awards and TC's employees had rendered all of the required service for the acquiree awards as of the acquisition date. What amount will be included in the consideration transferred to TC for the acquisition? 2. AC acquires TC. AC exchanges replacement awards that require one year of post combination service for share based payment awards of TC, for which employees had completed the vesting period before the business combination. The market based measure of both awards is CU100 at the acquisition date. When originally granted, TC's awards had a vesting period of four years. As of the acquisition date, the TC employees holding unexercised awards had rendered a total of seven years of service since the grant date. What amount will be included in the consideration transferred to TC for the acquisition? 3. AC exchanges replacement awards that require one year of post combination service for share based payment awards of TC, for which employees had not yet rendered all of the service as of the acquisition date. The market based measure of both awards is CU100 at the acquisition date. When originally granted, the awards of TC had a vesting period of four years. As of the acquisition date, the TC employees had rendered two years' service, and they would have been required to render two additional years of service after the acquisition date for their awards to vest. Accordingly, only a portion of the TC awards is attributable to precombination service. What amount will be included in the consideration transferred to TC for the acquisition? 4. Assume the same facts as in Example 3 above, except that AC exchanges replacement awards that require no post combination service for share based payment awards of TC for which employees had not yet rendered all of the service as of the acquisition date. The terms of the replaced TC awards did not eliminate any remaining vesting period upon a change in control. (If the TC awards had included a provision that eliminated any remaining vesting period upon a change in control, the guidance in Example 1 would apply.) The market based measure of both awards is CU100. Because employees have already rendered two years of service and the replacement awards do not require any post combination service, the total vesting period is two years. What amount will be included in the consideration transferred to TC for the acquisition? Instituut van de Bedrijfsrevisoren 17

18 Intangible assets INTANGIBLE ASSETS 1. The following are examples of identifiable intangible assets acquired in a business combination. Some of the examples may have characteristics of assets other than intangible assets. Intangible assets are identifiable if they have a contractual basis or if they are separable. Intangible assets identified as having a contractual basis might also be separable but separability is not a necessary condition for an asset to meet the contractual legal criterion. Explain for the following intangible assets why they meet the definition of an identifiable asset. Marketing related intangible assets Trademarks, trade names, service marks, collective marks and certification marks Internet domain names Customer related intangible assets Customer lists Order or production backlog Customer contracts and the related customer relationships Non contractual customer relationships Artictic related intangible assets Plays, operas and ballets Books, magazines, newspapers and other literary works Musical works such as compositions, song lyrics and advertising jingles Instituut van de Bedrijfsrevisoren 18

19 Intangible assets Pictures and photographs Video and audiovisual material, including motion pictures or films, music videos and television programmes Contract based intangible assets Servicing contracts, such as mortgage servicing contracts Employment contracts Use rights, such as drilling, water, air, timber cutting and route authorities Computer software and mask works Databases, including title plants Trade secrets such as secret formulas, processes and recipes Instituut van de Bedrijfsrevisoren 19

20 Intangible assets 2. Determine for the following situations whether an intangible assets should be recognised 2.1 Acquirer Company (AC) acquires Target Company (TC) in a business combination on 31 December 20X5. TC has a five year agreement to supply goods to Customer. Both TC and AC believe that Customer will renew the agreement at the end of the current contract. The agreement is not separable AC acquires TC in a business combination on 31 December 20X5. TC manufactures goods in two distinct lines of business: sporting goods and electronics. Customer purchases both sporting goods and electronics from TC. TC has a contract with Customer to be its exclusive provider of sporting goods but has no contract for the supply of electronics to Customer. Both TC and AC believe that only one overall customer relationship exists between TC and Customer AC acquires TC in a business combination on 31 December 20X5. TC does business with its customers solely through purchase and sales orders. At 31 December 20X5, TC has a backlog of customer purchase orders from 60 per cent of its customers, all of whom are recurring customers. The other 40 per cent of TC's customers are also recurring customers. However, as of 31 December 20X5, TC has no open purchase orders or other contracts with those customers AC acquires TC, an insurer, in a business combination on 31 December 20X5. TC has a portfolio of oneyear motor insurance contracts that are cancellable by policyholders. 3. Olegna acquires Enile on 30 December 20X8. In the balance sheet of Enile there is amount recognized for goodwill in relation to an acquisition on 1 February 2008 of Siabot. Is this goodwill part of the identifiable assets acquired an liabilities assumed in the business combination on 30 December 20X8?. Instituut van de Bedrijfsrevisoren 20

21 Reverse acquisitions REVERSE ACQUISITIONS 1. Entity B, the legal subsidiary, acquires Entity A, the entity issuing equity instruments and therefore the legal parent, in a reverse acquisition on 30 September 20X6. The statements of financial position of Entity A and Entity B immediately before the business combination are: Entity A (legal parent, accounting acquiree) Entity B (legal subsidiary, accounting acquirer) CU CU Current assets Non current assets Total assets Current liabilities Non current liabilities Total liabilities Shareholders' equity Retained earnings Issued equity 100 ordinary shares ordinary shares 600 Total shareholders' equity Total liabilities and shareholders' equity Other information On 30 September 20X6 Entity A issues 2,5 shares in exchange for each ordinary share of Entity B. All of Entity B's shareholders exchange their shares in Entity B. Therefore, Entity A issues 150 ordinary shares in exchange for all 60 ordinary shares of Entity B. The fair value of each ordinary share of Entity B at 30 September 20X6 is CU40. The quoted market price of Entity A's ordinary shares at that date is CU16. The fair values of Entity A's identifiable assets and liabilities at 30 September 20X6 are the same as their carrying amounts, except that the fair value of Entity A's non current assets at 30 September 20X6 is CU Calculate the fair value of the consideration transferred Measure the goodwill Prepare the consolidated statement of financial position at 30 September 20X6 Instituut van de Bedrijfsrevisoren 21

22 Reverse acquisitions Assume that Entity B's earnings for the annual period ended 31 December 20X5 were CU600 and that the consolidated earnings for the annual period ended 31 December 20X6 were CU800. Assume also that there was no change in the number of ordinary shares issued by Entity B during the annual period ended 31 December 20X5 and during the period from 1 January 20X6 to the date of the reverse acquisition on 30 September 20X6. Calculate the earnings per share 2. Assume the same facts as above, except that only 56 of Entity B's 60 ordinary shares are exchanged. Calculate the fair value of the consideration transferred Measure the non controlling interest Prepare the consolidated statement of financial position at 30 September 20X6 Instituut van de Bedrijfsrevisoren 22

23 Income taxes INCOME TAXES Mocas purchased 75% of the capital of Haraf for CU on 1 July 20X0. at this date the equity of Haraf was: CU Share capital General reserve Retained earnings At this date Haraf had not recorded any goodwill, and all identifiable assets and liabilities were recorded at fair value except for the following cases: Carrying amount Fair value Cu CU Inventory Plant (cost CU ) Land The tax rate is 30%. Calculate the goodwill and determine the journal entries related to the business combination. Assume that the minority interest is measured based on the interest in the fair value of the net assets. Instituut van de Bedrijfsrevisoren 23

24 Impairment of goodwill IMPAIRMENT OF GOODWILL 1. One of the cash generating units of Amneris contains goodwill and has to be tested for impairment. The carrying amounts of the assets of that cash generating unit are as follows: Carrying amount Goodwill Property, plant and equipment Equipment The recoverable amount of this cash generating unit is The fair value less costs to sell of the property, plant and equipment is a. Calculate the impairment loss and allocate the impairment loss to the different elements in the cash generating unit. b. How would your answer change if the fair value les costs to sell of the property, plant and equipment was ? 2. Avendus recently acquired a company called Fishright, a small fishing and fish processing company for 2 million CU. Avendus allocated the purchase consideration as follows ACCA (Question 26 b) iii))) Goodwill Fishing quotas Fishing boats (2 of equal value) Other fishing equipment Fish processing plant Net current assets Shortly after the acquisition, one of the fishing boats sank in a storm and this has halved the fishing capacity. Due to this reduction in capacity, the value in use of the fishing business as a going concern is estimated at only 1.2 million CU. The fishing quotas now represent a greater volume than one boat can fish and it is not possible to replace the lost boat as it was rather old and no equivalent boats are available. However the fishing quotas are much in demand and could be sold for CU. Avendus has been offered for the fish processing plant. The net current assets consist of accounts receivable and payable. Calculate the amounts that would appear in the consolidated financial statements of Avendus in respect of Fishright's assets after accounting for the impairment loss. Instituut van de Bedrijfsrevisoren 24

25 Impairment of goodwill 3. Parent acquires an 80 % ownership interest in Subsidiary for CU2 100 on 1 January 20X3. At that date, Subsidiary's net identifiable assets have a fair value of CU Parent chooses to measure the noncontrolling interests as the proportionate interest of Subsidiary's net identifiable assets of CU300 (20% of CU1,500). Goodwill of CU900 is the difference between the aggregate of the consideration transferred and the amount of the non controlling interests (CU CU300) and the net identifiable assets (CU1 500). The assets of Subsidiary together are the smallest group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Therefore Subsidiary is a cashgenerating unit. Because other cash generating units of Parent are expected to benefit from the synergies of the combination, the goodwill of CU500 related to those synergies has been allocated to other cash generating units within Parent. Because the cash generating unit comprising Subsidiary includes goodwill within its carrying amount, it must be tested for impairment annually, or more frequently if there is an indication that it may be impaired. At the end of 20X3, Parent determines that the recoverable amount of cash generating unit Subsidiary is CU The carrying amount of the net assets of Subsidiary, excluding goodwill, is CU Determine how to account for the impairment loss. 4. Parent acquires an 80 % ownership interest in Subsidiary for CU2 100 on 1 January 20X3. At that date, Subsidiary's net identifiable assets have a fair value of CU Parent chooses to measure the non controlling interests at fair value, which is CU350. Goodwill of CU950 is the difference between the aggregate of the consideration transferred and the amount of the non controlling interests (CU CU350) and the net identifiable assets (CU1 500). The assets of Subsidiary together are the smallest group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Therefore, Subsidiary is a cashgenerating unit. Because other cash generating units of Parent are expected to benefit from the synergies of the combination, the goodwill of CU500 related to those synergies has been allocated to other cash generating units within Parent. Because Subsidiary includes goodwill within its carrying amount, it must be tested for impairment annually, or more frequently if there is an indication that it might be impaired. a. Determine how to account for the impairment loss. Suppose that the assets of Subsidiary will generate cash inflows together with other assets or groups of assets of Parent. Therefore, rather than Subsidiary being the cash generating unit for the purposes of impairment testing, Subsidiary becomes part of a larger cash generating unit, Z. Other cash generating units of Parent are also expected to benefit from the synergies of the combination. Therefore, goodwill related to those synergies, in the amount of CU500, has been allocated to those other cash generating units. Z's goodwill related to previous business combinations is CU800. At the end of 20X3, Parent determines that the recoverable amount of cash generating unit Z is CU The carrying amount of the net assets of Z, excluding goodwill, is CU b. Determine how to account for the impairment loss. Instituut van de Bedrijfsrevisoren 25