IFRS 3 Business Combinations IFRS 3 Business Combinations
• Scope: Scope: The standard does not cover The standard does not cover
– Combination in which separate entities are brought together Combination in which separate entities are brought together to form a joint venture.
to form a joint venture.
– Combination involving entities or businesses under common Combination involving entities or businesses under common control
control
– Combination involving two or more mutual entities. Combination involving two or more mutual entities.
– Combinations whereby the entities are brought together by Combinations whereby the entities are brought together by contract alone, without any ownership interest arising
contract alone, without any ownership interest arising
• Business Combination involving entities or businesses Business Combination involving entities or businesses under common control
under common control Entity A
Entity B Entity X
Entity Y Entity C
Entity B Entity A
Entity C Entity X Entity Y
IFRS 3 Business Combinations Contd…
IFRS 3 Business Combinations Contd…
• Business Combination:Business Combination: The bringing together of separate entities The bringing together of separate entities or businesses into one reporting entity.
or businesses into one reporting entity.
• Method of accounting: Purchase methodMethod of accounting: Purchase method
• Application of the purchase method: Application of the purchase method: It involvesIt involves – Identifying an acquirerIdentifying an acquirer
– Determining the acquisition dateDetermining the acquisition date
– Measuring the cost of the business combinationMeasuring the cost of the business combination
– Allocating, at the acquisition date, the cost of the business Allocating, at the acquisition date, the cost of the business
combination to the assets acquired and liabilities and contingent combination to the assets acquired and liabilities and contingent
liabilities assumed.
liabilities assumed.
• Identifying the acquirer: An entity that obtains control of other combining Identifying the acquirer: An entity that obtains control of other combining entities or businesses.
entities or businesses.
• Control is the power to govern the financial and operating policies of an entity Control is the power to govern the financial and operating policies of an entity or businesses so as to obtain benefits from its activities.
or businesses so as to obtain benefits from its activities.
IFRS 3 Business Combinations Contd…
IFRS 3 Business Combinations Contd…
• Acquisition of less than or equal to 50% of ownership can Acquisition of less than or equal to 50% of ownership can result in control, if one of the combining entities obtains:
result in control, if one of the combining entities obtains:
– power over more than 50% of the voting rights by virtue of power over more than 50% of the voting rights by virtue of an agreement with other investors
an agreement with other investors
– power to govern the financial and operating policies of the power to govern the financial and operating policies of the other entity under a statute or an agreement
other entity under a statute or an agreement
– power to appoint or remove the majority of the members power to appoint or remove the majority of the members of the board of directors or equivalent governing body of the board of directors or equivalent governing body – power to cast the majority of votes at meetings of the power to cast the majority of votes at meetings of the
board of directors or equivalent governing body board of directors or equivalent governing body
• Determining the acquisition dateDetermining the acquisition date: date on which the : date on which the acquirer effectively obtains control of the acquiree. This is acquirer effectively obtains control of the acquiree. This is normally the date on which the acquirer legally transfers the normally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities consideration, acquires the assets and assumes the liabilities of the acquiree.
of the acquiree.
IFRS 3 Business Combinations Contd…
IFRS 3 Business Combinations Contd…
• Cost of a business combination: Cost of a business combination: Fair value at the date of exchange, Fair value at the date of exchange, of of
– assets givenassets given
– liability incurred or assumed andliability incurred or assumed and
– equity instruments issued by the acquirerequity instruments issued by the acquirer ++
any cost directly attributable to the business combination.
any cost directly attributable to the business combination.
• Costs included in the cost of a business combination: Fees Costs included in the cost of a business combination: Fees payable to merchant banks, lawyers, accountants and other advisors payable to merchant banks, lawyers, accountants and other advisors for:for:
– Valuing the acquireeValuing the acquiree
– Undertaking due diligence workUndertaking due diligence work – Auditing the completion accountsAuditing the completion accounts
– Negotiating the price and completing the transactionNegotiating the price and completing the transaction
• Costs excluded from the cost of a business combination: Costs excluded from the cost of a business combination:
– Cost of maintaining the acquisition departmentCost of maintaining the acquisition department
– Professional fees paid to investigate potential acquisition targetsProfessional fees paid to investigate potential acquisition targets – Costs of issuing debt securities.Costs of issuing debt securities.
– Costs of registering and issuing equity securitiesCosts of registering and issuing equity securities
IFRS 3 Business Combinations Contd…
IFRS 3 Business Combinations Contd…
• Contingent consideration: Contingent consideration:
– When a business combination agreement provides for an When a business combination agreement provides for an
adjustment to the cost of the combination contingent on future adjustment to the cost of the combination contingent on future events, it should be included in the cost of the combination if events, it should be included in the cost of the combination if payment is probable and can be measured reliably.
payment is probable and can be measured reliably.
– Subsequent payment to compensate for reduction in value of the Subsequent payment to compensate for reduction in value of the assets given, equity/debt instruments issued in exchange for control assets given, equity/debt instruments issued in exchange for control of the acquiree.
of the acquiree.
• Allocating the cost of business combination: Recognise cost of Allocating the cost of business combination: Recognise cost of identifiable assets, liabilities and contingent liability at fair value except identifiable assets, liabilities and contingent liability at fair value except for non-current assets (or disposal groups) that are classified as held for for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5, which shall be recognised at fair value sale in accordance with IFRS 5, which shall be recognised at fair value less costs to sell.
less costs to sell.
– in case of an asset other than an intangible asset, it is probable that in case of an asset other than an intangible asset, it is probable that any associated future economic benefits will flow to the acquirer, any associated future economic benefits will flow to the acquirer, and its fair value can be measured reliably.
and its fair value can be measured reliably.
– in the case of liability other than a contingent liability, it is probable in the case of liability other than a contingent liability, it is probable that an outlfow of resources embodying economic benefits will be that an outlfow of resources embodying economic benefits will be required to settle the obligation, and its fair value can be measured required to settle the obligation, and its fair value can be measured reliably,
reliably,
– in the case of intangible asset or a contingent liability, its fair value in the case of intangible asset or a contingent liability, its fair value can be measured reliably.
can be measured reliably.
IFRS 3 Business Combinations Contd…
IFRS 3 Business Combinations Contd…
• Determination of Fair ValueDetermination of Fair Value
– Land and Buildings: at market valueLand and Buildings: at market value
– Plant and equipment: at market value or depreciated Plant and equipment: at market value or depreciated replacement cost
replacement cost
– Intangible assets: by reference to an active market, if one exists Intangible assets: by reference to an active market, if one exists or or
if no active market exists, on a basis that reflects the amounts the if no active market exists, on a basis that reflects the amounts the acquirer would have paid for the assets in arm’s length transactions acquirer would have paid for the assets in arm’s length transactions between knowledgeable willing parties.
between knowledgeable willing parties.
– Financial Instruments:Financial Instruments: Instruments traded in an active market at Instruments traded in an active market at their current market values
their current market values
for other at their estimated values that take into consideration price for other at their estimated values that take into consideration price earnings ratio, dividend yield and expected growth rates of
earnings ratio, dividend yield and expected growth rates of comparable instruments of entities with similar characteristics comparable instruments of entities with similar characteristics
– Finished goods and merchandise: at selling price less the cost Finished goods and merchandise: at selling price less the cost of disposal and a reasonable profit allowance for the selling effort of of disposal and a reasonable profit allowance for the selling effort of the acquirer
the acquirer
– Work in progress: at selling price less the sum of costs to Work in progress: at selling price less the sum of costs to
complete, costs of disposal and a reasonable profit allowance for complete, costs of disposal and a reasonable profit allowance for the completing and selling effort of the acquirer
the completing and selling effort of the acquirer – Raw materials: at current replacement costRaw materials: at current replacement cost
IFRS 3 Business Combinations Contd…
IFRS 3 Business Combinations Contd…
– Receivables: Receivables: at the present values of the amounts to be at the present values of the amounts to be
received, determined at appropriate current interest rates, less received, determined at appropriate current interest rates, less allowance for uncollectibility and collection costs.
allowance for uncollectibility and collection costs.
– Accounts and Notes payable, long-term debt, liabilities, Accounts and Notes payable, long-term debt, liabilities, accruals and other claims payable:
accruals and other claims payable: at the present values of at the present values of the amounts to be disbursed, determined at appropriate current the amounts to be disbursed, determined at appropriate current interest rates
interest rates
– Onerous contracts and other identifiable liabilities:Onerous contracts and other identifiable liabilities: at the at the present values of the amounts to be disbursed, determined at present values of the amounts to be disbursed, determined at appropriate current interest rates
appropriate current interest rates
– Defined benefit plans: at the present value of the defined Defined benefit plans: at the present value of the defined benefit obligation, less the fair value of any plan assets.
benefit obligation, less the fair value of any plan assets.
– Tax assets and liabilities:Tax assets and liabilities: at the amount of tax benefit arising at the amount of tax benefit arising form tax losses or the taxes payable in respect of profit or loss form tax losses or the taxes payable in respect of profit or loss in accordance with IAS 12. Deferred tax assets and liabilities are in accordance with IAS 12. Deferred tax assets and liabilities are recognised for differences from assigning fair values to net
recognised for differences from assigning fair values to net assets that are different from their tax bases.
assets that are different from their tax bases.
– Contingent Liabilities:Contingent Liabilities: at the amount that a third party would at the amount that a third party would charge to assume those contingent liaiblities.
charge to assume those contingent liaiblities.
– Liabilities for future losses and restructuring provisions Liabilities for future losses and restructuring provisions – – not to be recognisednot to be recognised
IFRS 3 Business Combinations Contd…
IFRS 3 Business Combinations Contd…
• Subsequent Valuation of Contingent Liability (other than Subsequent Valuation of Contingent Liability (other than covered by IAS 39):
covered by IAS 39): At the higher of At the higher of
– the amount that would be recognised in accordance with IAS the amount that would be recognised in accordance with IAS 37, and
37, and
– the amount initially recognised less, when appropriate, the amount initially recognised less, when appropriate,
cumulative amortisation recognised in accordance with IAS 18, cumulative amortisation recognised in accordance with IAS 18,
‘Revenue’.
‘Revenue’.
• Provisional fair values: Should be adjusted and finalised, if Provisional fair values: Should be adjusted and finalised, if
necessary, within 12 months of the acquistion date. Corresponding necessary, within 12 months of the acquistion date. Corresponding adjustment should be made to goodwill and comparative
adjustment should be made to goodwill and comparative information should be revised.
information should be revised.
• Subsequent adjustments to goodwill: Subsequent adjustments to goodwill: No time limitNo time limit – Contingent considerationContingent consideration
– Recognising deferred tax assets after the initial accounting is Recognising deferred tax assets after the initial accounting is complete
complete
– To correct an error in accordance with IAS 8.To correct an error in accordance with IAS 8.
IFRS 3 Business Combinations Contd…
IFRS 3 Business Combinations Contd…
• Measurement of Goodwill:Measurement of Goodwill: Goodwill is measured as the excess of the Goodwill is measured as the excess of the cost of business combination over the acquirer’s interest in the net fair cost of business combination over the acquirer’s interest in the net fair value of the assets.
value of the assets.
• Negative goodwill: Reassess the identification and measurement of Negative goodwill: Reassess the identification and measurement of the acquiree’s identifiable assets, liabilities and contingent liabilities and the acquiree’s identifiable assets, liabilities and contingent liabilities and the measurement of the combination’s cost and recognise immediately the measurement of the combination’s cost and recognise immediately in profit or loss any excess remaining after that reassessment.
in profit or loss any excess remaining after that reassessment.
• No amortisation, tested for impairment annually.No amortisation, tested for impairment annually.
• Business Combination achieved in stages: Business Combination achieved in stages:
– Accounting for business combination comments from the acquisition Accounting for business combination comments from the acquisition date, i.e. the date from which the control is obtained.
date, i.e. the date from which the control is obtained.
– For goodwill calculation, each exchange transaction is treated For goodwill calculation, each exchange transaction is treated separately.
separately.
– Any adjustment to fair values of the acquiree’s identifiable assets, Any adjustment to fair values of the acquiree’s identifiable assets, liabilities an dcontingent liabilities relating to the acquirer’s
liabilities an dcontingent liabilities relating to the acquirer’s
previously held interests is accounted for as revaluation surplus.
previously held interests is accounted for as revaluation surplus.
– Changes in the investee’s retained earnings and other equity Changes in the investee’s retained earnings and other equity
balances after each exchange transaction should be included in the balances after each exchange transaction should be included in the post-combination consolidated financial statements to the extent post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
that they relate to the previously held ownership interests.
IFRS 3 Business Combinations Contd…
IFRS 3 Business Combinations Contd…
• Example: Example: Entity A acquired 10% equity shares in entity B for Rs Entity A acquired 10% equity shares in entity B for Rs 2 crores on 1
2 crores on 1stst Jan, 04, when the fair value of its net assets was Jan, 04, when the fair value of its net assets was Rs 15 crores. Subsequently on 1
Rs 15 crores. Subsequently on 1stst Jan, 08 it acquired, further 50% Jan, 08 it acquired, further 50%
of equity in entity B for Rs 12 crores. Fair value of net assets on of equity in entity B for Rs 12 crores. Fair value of net assets on this date was Rs 20 crores (entire increase in fair value from Rs this date was Rs 20 crores (entire increase in fair value from Rs 15 crores to Rs 20 crores is attributable to property).
15 crores to Rs 20 crores is attributable to property).
• (Rs Crores)(Rs Crores) Goodwill
Goodwill
11stst Jan, 04 transaction Jan, 04 transaction CostCost 2.002.00
Net assets at fair value (15 * 10%)
Net assets at fair value (15 * 10%) 1.501.50 Goodwill
Goodwill 0.500.50
11stst Jan, 08 transaction Jan, 08 transaction CostCost 12.0012.00
Net assets at fair value (20 * 50%)
Net assets at fair value (20 * 50%) 10.0010.00 Goodwill
Goodwill 2.002.00
IFRS 3 Business Combinations Contd…
IFRS 3 Business Combinations Contd…
• Net assets are accounted for as follows:Net assets are accounted for as follows:
(Rs crores) (Rs crores) Net Assets (at fair value at acquisition date)
Net Assets (at fair value at acquisition date) 20.0020.00 Goodwill ( 0.50 + 2.00)
Goodwill ( 0.50 + 2.00) 2.50 2.50
Revaluation gain ((20 – 15) * 10%)
Revaluation gain ((20 – 15) * 10%) (0.50) (0.50) Minority Interest
Minority Interest (20 * 40%)(20 * 40%) ( 8.00)
( 8.00)
Overall cost of the combination
Overall cost of the combination 14.0014.00