Accounting for business Combinations Flashcards
What are we seeing as the largest thing for growth for companies?
Acquisitions, thus the accounting for it is important.
What is a business combination?
business combination involves an entity obtaining control over one or more businesses
Why is it that when you acquire another firm it goes on parent company balance sheet?
Because it counts as an asset
1) control is of a result of past event
2) benefits will follow to the accquirer in the future ( in the form of dividends)
3) we can also establish the price
What are we focusing on mainly here?
AS IFRS 3 AND 10 are complex we only want to focus on how consolidation effects the balance sheet/IS and different approaches.
Explain the income statement?
When you consolidate you essentially combine the two firms as if it was one entity, but intra transactions should not be consolidated and need to be removed, it is makes clear sense why net income is higher too.
Explain the impact on performance measures?
all of these are higher and makes sense.
ROE could be skewed because you might see a increase not because of improved CI but simply because of acquiring a new firm, key all else equal.
H bought 80 per cent of the shares of S at a price of €640,000.
The fair value of the net assets of S at the acquisition date was €700,000.
* If H had acquired 100 per cent of the shares, the purchase price would have been €790,000.
Calculate the fair value of the NCI
Also can we use price and fair value interchangeably?
Fair value of the non-controlling interest is, therefore, €150,000 (€790,000 - €640,000).
Yes we can
We are going to see a couple special issues with accordance to iFRS 3?
H bought 80 per cent of the shares of S at a price of €640,000.
The fair value of the net assets of S at the acquisition date was €700,000.
* If H had acquired 100 per cent of the shares, the purchase price would have been €790,000.
* Fair value of the non-controlling interest is, therefore, €150,000
(€790,000 - €640,000).
* Calculate the goodwill in accordance with IFRS 3.
First of all there are 2 ways to calculate good will, lets look at the proportionate way ( not based on FV) ?
Fair value of consideration transferred + NCI + FV of previous equity interests - FV of S’s net assets
e are going to see a couple special issues with accordance to iFRS 3?
H bought 80 per cent of the shares of S at a price of €640,000.
The fair value of the net assets of S at the acquisition date was €700,000.
* If H had acquired 100 per cent of the shares, the purchase price would have been €790,000.
* Fair value of the non-controlling interest is, therefore, €150,000
(€790,000 - €640,000).
* Calculate the goodwill in accordance with IFRS 3 use the fair value method?
Fair value of consideration transferred + NCI ( fair value) + FV of previous equity interests - FV of S’s net assets
We are going to look at a second special issue, which is stages.
H holds 30% of the voting shares of S entity which it purchased several years ago at a cost of €250,000. As of 31 December 20X2, H purchased a further 50 per cent of S for a consideration of €600,000. The fair value of S’s net assets on 31 December 20X2 is €1 million. It is estimated that H paid a premium of €50,000.
Essentially what is the issue here IFRS wants us to solve?
In total we have 80% of the business but we brought it at separate times, so we need to account for the differences in value the first time we buy and the second time we buy
We are going to look at a second special issue, which is stages.
H holds 30% of the voting shares of S entity which it purchased several years ago at a cost of €250,000. As of 31 December 20X2, H purchased a further 50 per cent of S for a consideration of €600,000. The fair value of S’s net assets on 31 December 20X2 is €1 million. It is estimated that H paid a premium of €50,000.
Identify:
* the amount to be included in profit or loss;
* the amount of goodwill;
* the non-controlling interest
lets look at another special case? Remeasurement
what happens to goodwill?
the fair value you identified provisionally on 31 december will have to be depreciated, hence we should need to adjust this if there is difference in provisional and actual values
Building 1: adjusted from $500000 to $650000
Building 2: no adjustment
Plant and equipment: you could say we need to adjust but we need to take into account depreciation, so maybe depreciation offsets part of this adjustment. ( we can see using straight line 90000/5 = 18000pa and by quarter its 4500 exactly offsetting difference)
Damages: adjustment to $300000
Goodwill is reduced to 100000. ( as net assets are larger, hence Good will becomes smaller)
Next issue contingent consideration which is included in purchase price, if the company hits certain targets e.g. they pay more.
Entity A acquired 80% of B (the fair value of the assets of B was €625,000). The purchase price was €600,000 plus additional contingent payments. The fair value of the earn-out liability (contingent consideration) at acquisition date was €45,000.
* Entity A guaranteed the price of the securities issued to B for six months.
* At year-end the earn-out liability is €100,000.
* Identify the goodwill on the acquisition and the adjustments needed at year-end.
If Contingent goes up we don’t actually adjust goodwill ( this was just to show goodwill would of gone up), the rest goes to P/L ( difference in goodwill with and without contingent consideration)
Final special issue is going from full owner to part owner with no non-controlling interest?
On 31 March 20Y2 the value of a subsidiary’s net assets
(excluding goodwill) is €400,000.
* At this date the parent reduces its share from 100 per
cent to 60 per cent for an amount of €200,000.
* Goodwill on the original acquisition was €80,000.
* How should the parent account for this transaction?
Goes into P/l because we get more than what we give up.
When we do consolidations what are the 3 steps we must take?
1) calculate goodwill
2) revalue net assets to FV
3) consolidate.
First of all what is the percentage in which H invested in S?
We are not given this but we know that H acquired 1 million 10c shares of so proceeds are 100000, then the total amount of shares S has of 10c shares is 125000
so we can find total proportion = 100000/125000 x 100 = 80%
Consolidate B/S?
We subtract 120, as the question clearly the transaction hasn’t been H’s account yet so we have to subtract from Net current assets
Another example ( this example we are asked to do consolidation one year ahead.) Remember if we have no liabilities net assets = equity section .
1) Calculate goodwill so we paid = 9,600
FV of S’s net assets = equity section ( share capital(8000) + reserves ( 2000 at time we made the acquisition) = 10000. We use 2000 because goodwill is at acquisition date.
We acquire 80% of it
WITH NCI you just add 1000 you don’t find 20% we havent sold anything.
(Hard example)
Remember that the only thing that is historical cost is goodwill, so in the reserves, this is post acquisition, so we need to remove previous reserve value and any fake profits.
Remember b sold to a so it affects NCI too
Lets look at a consolidated partial year example. Consolidate this for half a year
