Business Combination CA Yagnesh Desai ymdesaiandco@gmail.com 093222 44770 09820133227 yagnesh@caymd.com 1
Indicators Not necessarily Limits by the Standard Above 50 % Control Hence Consolidate Control Consolidate IFRS 3, IAS 27, SIC 12 Significant Influence Equity Method More than 20 % and up to 50 % Investment in Associates Significant Influence.IAS 28 No Significant Influence Cost Method or IAS 39 2 yagnesh@caymd.com Up to 20 % Other Fair value IAS 39
Method of Accounting Pooling of interest method Acquisition Method (Purchase method ) 3 yagnesh@caymd.com
Definitions 4 yagnesh@caymd.com
Identify the Acquirer Steps in Acquisition Method Recognising & Measuring Goodwill or gain in Bargain Purchase Recognizing & Measuring IA acquired, Liabilities Assumed & any NCI in acquiree Determine the Acquisition Date 5 yagnesh@caymd.com
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Asset or a Business Is it a Business? Yes No Do We Have Control? No IAS 16 Yes IFRS 3 IAS 28 or IAS 31 7
Set of Activities and Assets What constitutes Business? 8 yagnesh@caymd.com
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Guidance by IAS 27 Power to Govern Financial & Operating Policies To Obtain Benefit 10 yagnesh@caymd.com
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Application of SIC 12 results in consolidation of many vehicles that would have otherwise resulted in Off Balance Sheet treatment 12 yagnesh@caymd.com Where it has been Determined that an Entity is not a subsidiary under guidance in IAS 27 it may still be considered as subsidiary if it a SPE under SIC 12 SPV Under IFRS there is no specific definition of SPE. SIC 12 explains a number of situation that indicates there is relationship whereby the originator controls the SPE.
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Indicators of Acquirer When it is difficult to Identify Acquirer yagnesh@caymd.com 14
Types of Business Combinations Acquirer Existing Entity yagnesh@caymd.com 15
Types of Business Combination yagnesh@caymd.com 16
A & B Transfer Net Assets to Newly Formed Entity - C A & B Shareholders of C 100 Shares 50 shares Who is the Acquirer? yagnesh@caymd.com 17
IF Shell Company Book Value Acquisition Method IF Not ---------- yagnesh@caymd.com 18
Is the Acquirer Acquisition Method Acquisition Method yagnesh@caymd.com 19
Determine Acquisition Date. Acquisition Date Obtains Control AlsoNormally the.. date on which Acquirer Transfers the Consideration Depending on Pertinent facts Acquisition Date could be earlier or later than the Closing Date 20 yagnesh@caymd.com
Reverse Acquisition Private Entity Listed Entity A B Legal Acquiree Accounting Acquirer Legal Acquirer Accounting Acquiree 21 Accounting is done from the perspective of Accounting Acquirer yagnesh@caymd.com
Steps in.method Fill The Gaps Recognising & Measuring Goodwill or Recognizing & Measuring IA acquired, Liabilities Assumed & any in acquiree Determine the Purchase Date!!! Identify the? 22 yagnesh@caymd.com
Acquisition Date Agenda -1 Recognise & Measure - @ FV subject to Exceptions 1. Identifiable Assets, besides Goodwill 2. Liabilities Assumed & 3. Any NCI, If Any Provided 1. They Meet the Recognition Criteria laid down in Framework. AND 2. Exchanged in Business Combination Transaction & Not Separate Transaction 23 yagnesh@caymd.com
Recognition 24 yagnesh@caymd.com
Intangible Assets Other Than Goodwill Regardless of subsequent Use by Acquirer AND AND 25 yagnesh@caymd.com
Contractual 26 yagnesh@caymd.com
Separatedly Identifiable 27 yagnesh@caymd.com
Contractual 28 yagnesh@caymd.com
Separatedly Identifiable 29 yagnesh@caymd.com
Acquisition Date Agenda -2 Classify or Designate Identifiable & Liabilities Assumed With Exception of 1. On The Basis of : Contractual Terms, Economic Conditions, its operating or accounting policies & Other pertinent conditions at AD e.g. Financial Instruments IAS 39. 30 Lease Contract & Insurance Contract yagnesh@caymd.com Classification Based on conditions based etc on Inception Date unless modified as at AD
Acquisition Date Agenda - Measurement Identifiable Assets & Liabilities Assumed AT Fair Value as at Acquisition date with Limited Exceptions 31 yagnesh@caymd.com
Exceptions to FV @ AD Recognition Contingent Liabilities Even if Outflow is not probable. Recognition & Measurement 1.Income Taxes as per IAS 12 2.Employee Benefits IAS 19 3. Indemnification Assets Measurement 1.Reacquired Rights 2,Share Based Payments 3,Assets held for sale 32 yagnesh@caymd.com Contingent Consideration
Operating Leases If Favourable If Not Favourable No Assets or Liabilities related to Operating Leases to be accounted for by Acquirer Acquirer shall recognise an Intangible Asset Favourable An acquirer shall recognise as a 33 Liability
What forms Part of Business Combination The acquirer is responsible for identifying amounts that are not part of the exchange for the acquiree. Identify the components that comprise the transaction in which the acquirer obtained control over the acquiree Substance over form. For Inclusion or Exclusion from business combination which of the parties to be benefited. Primarily for the benefit of Transaction likely to be -----------------------------------------------*---------------------------------------- Acquirer or combined entity Separate transaction Acquiree or its former owners Part of the business combination 34
Examples of What do Not form Part of Business Combination.? (a)a transaction that in effect settles pre-existing relationships between the acquirer and acquiree; Non Contractual \ Contractual. (b) a transaction that remunerates employees or former owners of the acquiree for future services; and (c) a transaction that reimburses the acquiree or its former owners for paying the acquirer s acquisitionrelated costs. 35
Forms of Consideration Purchase of Assumption of 36 yagnesh@caymd.com
Business Combinations Affected By A L L @ F A I R V A L U E 37 yagnesh@caymd.com
Acquisition-related costs, are the costs :- The acquirer incurs to effect a business combination. Like 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. These are expensed out and do not form part of Cost of Consideration of Business Combination. Exception Treated in accordance with IAS 39
Cost of Acquisition FV of Assets Given or Liabilities incurred- What treatment in profit or loss? The Equity Shares At? Any Directly Attributable Costs.? Any Answer? All at Acquisition Date. yagnesh@caymd.com 39
To Sum Up But NOT Future Losses & Costs & General Admin Costs & Others Cost Not Attributable to BC yagnesh@caymd.com 40
Block A 1. Consideration Measured at FV 2. Non Controlling Interest Goodwill Block B Identifiable Assets both Tangible & Intangible Minus Identifiable Liabilities 3. F V of Previously held Equity Interest in Acquiree = Net Assets 41
Good will Tested for Impairment Block A Block B Gain on Bargain Purchase Recognised in P & L Block A Block B 42 yagnesh@caymd.com
Non Controlling Interest in Acquiree Fair Value The NCI s Interest s Proportionate share in Acquiree s Identifiable Net Assets 43 yagnesh@caymd.com
ABC acquired 750,000 of the 10,00,000 equity shares of LMN. At a price of CU 5 each LMN s assets less liabilities was.. CU 4 Ml Estimated that the price paid included a premium per share of CU0.50 ( In order to gain control over LMN) 44 yagnesh@caymd.com
The fair value of the non-controlling interest is measured at CU1,125,000 (250,000 shares (CU5.00 0.50). Assets Account Dr.40,00,000 Goodwill..Dr...... 8,75,000 NCI Cr...11,25,000 Consideration Cr 37,50,000 45 yagnesh@caymd.com
The non-controlling interest s proportionate share of the acquiree s identifiable net assets is measured at CU1 million (CU4 million 25%). Assets Account Dr.40,00,000 Goodwill..Dr... 7,50,000 NCI Cr...10,00,000 Consideration Cr...37,50,000 46 yagnesh@caymd.com
A & B Enter into contract to govern. A is lager entity B is smaller one F V of B Is..100 B s Net Assets as per IFRS 3.....75 47 yagnesh@caymd.com
1 st Alternate : Measure Non Controlling Interest at Fair Value A1. Consideration. Nil A2. Non Controlling Interest...100 A3. FV of Previously Held Equity. Nil Total Block A...100 B. Net Assets......75 Goodwill....25 48 yagnesh@caymd.com
2 nd Alternate : Measure Non Controlling Interest at Proportionate Share of NCI A1. Consideration. Nil A2. Non Controlling Interest... 75 A3. FV of Previously Held Equity. Nil Total Block A...75 B. Net Assets.......75 Goodwill.... NIL 49 yagnesh@caymd.com
BC In Stages Step Acquisition Successive share purchases may have resulted in control being gained by the `acquirer Difference in Profit Or Loss with `some exceptions. Each share exchange transaction should be treated separately by the acquirer. Before qualifying as a business combination, the transaction may in fact be treated as an investment in an associate and be accounted for in accordance with IAS 28. yagnesh@caymd.com 50
The term negative goodwill OR excess of the acquirer s interest in the net fair value of the acquiree s identifiable assets, liabilities, and contingent liabilities over the cost. Dropped 51 yagnesh@caymd.com
Now Redefined as Bargain in Purchase 52 yagnesh@caymd.com
The identifiable net assets acquired Re- measure Any non-controlling interest in the acquiree Acquisition in Stages The consideration transferred. 53 yagnesh@caymd.com
Terms of an acquisition include the following : 1.If the acquiree s profit for the first full year following acquisition exceeds CU 2 Million, the acquirer will pay additional consideration of CU 6 Ml in cash three months after that year end. It is doubtful whether the acquiree will achieve this profit, hence the acquisition fair-value of this contingent consideration is CU 1,00,000. 2. A contract exists whereby the acquirer will buy certain components from the acquirer over the next five years. The Contract was signed when the market price for these components were markedly higher than they are at the acquisition date. At the acquisition date the fair value of the amount by which the contract price are expected to exceed the market price over the next five years is CU 1.5 Million. yagnesh@caymd.com 54
1.The consideration transferred should be increased by the fair value of the Contingent consideration of CU 1,00,000., This amount should be recognised as the Liability. 2.The acquirer now controls the acquiree and can therefore cancel this contract: it is not part of business combination. CU 1.5 Ml of the consideration should be recognised as an expense. yagnesh@caymd.com 55
X plc Acquiree $m FACTS Cost of acquisition 700 less fair value of net assets 300 less restructuring provision (70) ----- Goodwill 470 === Income statement at year end Profit before amortization 140 Amortization of goodwill (47) BALANCE 93 Interest (13) ---- Profit before tax 80 yagnesh@caymd.com 56
Z Is Acquirer X is the Acquiree FV At the date of acquisition, IA Continent Liability $100 ml $30 ml At the date of the preparation of the financial statements, the value of the net assets of X had increased significantly. The intangible assets have a life of 10 years. How would the acquisition be accounted for under IFRS 3? yagnesh@caymd.com 57
Solution $m Cost of acquisition 700 less fair value of net assets (300) less fair value of intangibles (100) Contingent liabilities 30 ------ Goodwill 330 === Income statement at year-end Profit before amortization 140 Amortization of intangibles (10) Goodwill impairment 0 Net Profit 130 Interest (13) Profit before tax 117 The restructuring provision is not allowed under IFRS. The intangibles will have to be accounted for and amortized over 10 years. The contingent liabilities will need recording also. The net assets of X have increased significantly, and, yagnesh@caymd.com 58 therefore, it is unlikely that goodwill will be impaired at the financial year end.
ABC acquired an 80 % interest in DEF for CU 9,00,000. The carrying amounts and FV of DEF s identifiable assets and liabilities at the acquisition date were as follows : CV,000 FV,000 Tangible Non Current Assets 375 350 Intangible Non Current Assets 0 200 Current Assets 400 350 Liabilities (300) (300) Contingent Liabilities 0 (30) ------ ------ Total 475 570 ==== ==== Goodwill is calculated as under : Consideration Transferred 900 NCI ( 20 % of CU 570) 114 -------- Total 1,014 Less : FV of net assets acquired 570 ------ Goodwill 444 ==== yagnesh@caymd.com 59
Post Combining Accounting Adjustment to Provisional Fair Value Measurement Period Specific & General Guidance for Measurement & Accounting 60 yagnesh@caymd.com
Adjustment to Provisional Fair Value Within The Measurement Period Not Within Measurement Period 61 Yes No
Measurement Period Starts at Acquisition Date Ends As soon as the desired information is received. BUT will not exceed... One Year from the AD 62
XYZ acquired ABC on 30 th June 2007. By 31 December 2007 XYZ had provisional FV for the followings. 1.Trademark effective in certain foreign territories of CU 4,00,000. these had an average remaining useful life of 10 Years as at acquisition date. The acquisition date FV was finalized at CU 5,00,000 as at 31.3.2008 2.Trading rights in another foreign territories of CU 6,00,000. These had an average remaining useful life of 5 yrs at the acquisition date. The acquisition date FV was finalised on 30 th September 2008 at CU 3,00,000. 3.XYZ Financial Statements as at 31.12.2007 Recognise as expenses : Amortization of Trademark Rights for 6 months based on provisional Values. 4.XYZ Financial statements for 2008. yagnesh@caymd.com 63
The finalization of FV of the trademark is made within the measurement period ( 12 Months), so it is related back to that date. The finalization in respect of the trading right is made after the end of that period, so it is recognised as expenses prospectively from 30 th September,2008. For the trademarks, the 2007 comparative figures will be restated for the revised amortization and carrying amount. yagnesh@caymd.com 64
Is Business Combination covered by one of the voluntary exemption of IFRS 1 -,i.e, on First Time Conversion? yagnesh@caymd.com 65
DISCLOSURES For each business combination, this information should be disclosed: (1) Names and descriptions of the combining entities (2) The acquisition date (3) The percentage of voting equity instruments acquired (4) The cost of the combination and a description of the components of that cost (5) Amounts recognized at the acquisition date for each class of the acquiree s assets, liabilities, and contingent liabilities and the carrying amounts of each of those classes immediately before the acquisition unless that is impracticable (6) The amount of any negative goodwill that has been shown in the income statement yagnesh@caymd.com 66
(7) The factors that contributed to the recognition of goodwill. (8) The amount of the acquiree s profit or loss since acquisition that has been included in the acquirer s profit or loss for the period, unless this is, again, impracticable. (9) The revenue of the combined entity for the period, as if the combination had occurred at the beginning of that period (10) The profit or loss of the combined entity for the period as if the combination had been effected at the beginning of the period. yagnesh@caymd.com 67
MULTIPLE-CHOICE QUESTIONS 1. Which of the following accounting methods must be applied to all business combinations under IFRS 3,Business Combinations? (a) Pooling of interests method. (b) Equity method. (c) Proportionate consolidation. (d) Purchase method. yagnesh@caymd.com 68
2. Purchase accounting requires an acquirer and an acquiree to be identified for every business combinations. Where a new entity (H) is created to acquire two preexisting entities, S and A, which of these entities will be designated as the acquirer? (a) H. (b) S. (c) A. (d) A or S. yagnesh@caymd.com 69
3. Which of the following examples is unlikely to meet the definition of an intangible asset for the purpose of IFRS 3? (a) Marketing related, such as trademarks and internet domain names. (b) Customer related, such as customer lists and contracts. (c) Technology based, such as computer software and databases. (d) Pure research based, such as general expenditure on research. yagnesh@caymd.com 70
4. An intangible asset with an indefinite life is one where (a) There is no foreseeable limit on the period over which the asset will generate cash flows. (b) The length of life is over 20 years. (c) The directors feel that the intangible asset will not lose value in the foreseeable future. (d) There is a contractual or legal arrangement that lasts for a period in excess of five years. Answer: yagnesh@caymd.com 71
5. An intangible asset with an indefinite life is accounted for as follows: (a) No amortization but annual impairment test. (b) Amortized and impairment tests annually. (c) Amortize and impairment tested if there is a trigger event. (d) Amortized and no impairment test. yagnesh@caymd.com 72
6. An acquirer should at the acquisition date recognize goodwill acquired in a business combination as an asset. Goodwill should be accounted for as follows: (a) Recognize as an intangible asset and amortize over its useful life. (b) Write off against retained earnings. (c) Recognize as an intangible asset and impairment test when a trigger event occurs. (d) Recognize as an intangible asset and annually impairment test (or more frequently if impairment is indicated). yagnesh@caymd.com 73
ILLUSTRATION LMN s acquisition of GHI for cash proceeded as follows: 23 January Approach made to the management of GHI seeking endorsement of the acquisition. 20 March Public offer made for 100% of equity shares of GHI, conditional on regulatory approval, shareholders approval and receiving acceptances representing 60% of GHI s shares. 14 June Regulatory approval received. 1 July Shareholder approval received. 30 July Acceptance received to date represent 50% of GHI s shares 15 August Acceptances received to date represent 95% of GHI s shares. 25 August Cash Paid put to GHI s Accepting shareholders. 13 November Cash paid out to the remaining shareholders under a compulsory share acquisition scheme. The acquisition date, being the date on which LMN obtains control over GHI, 30 July. yagnesh@caymd.com 74
Thank You 09820133227 09322244770 75 yagnesh@caymd.com