Business Combinations Flashcards
What is a business combination?
When someone pays something or nothing to someone else in order to acquire control over the assets, liabilities and equity interests
What legislation deals with a business combination?
IFRS 3
What are the important things to consider when dealing with a business combination?
- who is the acquirer and acquiree?
- What is the Acquisition date?
- what needs to be recognized?
- assets and liaibilities
- goodwill/ bargain purchase
- NCI
- how must things be classified?
- how will it be measured?
- assets and liaibilities
- goodwill/ bargain purchase
- NCI
- what needs to be disclosed?
What are the recognition requirements for a business combination?
Assets and liabilties
- we must apply the acquisiton method which means the following
- they must meet these requirements
* A/L must meet the conceptual framework criteria at acqusition date
* they must be part of what the acquirer and acquiree exchanged within the business combination transaction rather than part of another transaction
- but with a few exceptions listed on another flash card
- it should be noted that this may result in other assets and liabilities being recognised that were not previously recognised such as intangible assets
NCI
Goodwill/ bargain purchase
- Goodwill arises when you pay more for the net identifiable assets than their fair values put together. When you pay more for the shares than their fair value, this does not mean there is or isn’t goodwill
What items have a recognition exception only?
- IAS 37 liabilities and contingent liabilties
- the acquirer shall not recognise a contingent asset at all, just speak about it in the notes
- the acquirer shall recongise an contingent liability that has a present obligation and a reliable estimate for FV even if the outflow of economic resources is not probable (which is what made it a contingent liability
How must the assets and liabilties be classified?
- according to what IFRS 3 says AND
- leases where we are the lessor now are an exception and they need to be classified either as operating or finance lease ACCORDING to what IFRS 16 says
How do we measure a business combination?
initial measurement
~ Assets and liabilties
- measure assets and liabilties at acqusition date Fair Value (IFRS 13)
- measure NCI at FV or identifible share of assets
- something about App b guidance
- but there are some exceptions listed on another flashcard
~ Goodwill
~ NCI
subsequent measurement
~ Assets and liabilties
- account for all these things using their applicable standards BUT
- contingent liabilties must subsequently be measured at the higher of
* the amount that would be recognised in terms of IAS 37
* the amount initially recognised less any cumulative income recognised in terms of IFRS 15
- contingent consideration (what we might be paying them like if they reach a target profit margin)
* Doesn’t get remeasured if it’s equity, but if it’s in profit and loss its not equity
* If it relates to information about the situation at measurement date (it’s relevant to measurement period) then it’s dealt with like a measurement period adjustment
- look at what the standard says too
What items have a measurement exception only?
- reacquired rights
- definition - An acquirer may reacquire a right that it had previously granted to the acquiree to use one or more of the acquirer’s recognized or unrecognized assets
- measure it as an intangible asset on the basis of the remaining contractual term regardless of whether market participates would consider contract renewels when measuring its fair value
- share based payment transactions
- measure in accordance with IFRS 2
- assets held for sale
- in accordnace with IFRS 5
- insurance contracts
- we didn’t have to deal with this
What items have a measurement and a recognition exception?
- Income Taxes of IAS 12
- measure in accordance with IAS 12
- account for potential tax effects?
- employee benefits of IAS 19
- just apply the rules from IAS 19
- indemnification assets
- they can recognise and measure an asset if the people selling the business say they will pay for something if it happens (like a liability or something)
- leases in which the acquiree is the lessee
- the acquirer will recognise the leases in accordance with iFRS 16 BUT
- they are not required to recognise Right of use assets for
> leases if the lease term ends within 12 months of the acqusition date
> leases where the assets are of a low value - the lease liability must be be a PV of the remaining lease payments
- the right of use asset = lease laibility +/- adjustments to relfect favourable or unfavourable terms compared to the market
What is the disclosure required for a business combination?
What happens if a business combination has no transfer of consideration?
the acquisition method still applies
What is the measurement period and what rules come with it?
- it is the time provided after a business combination to identify and measure everything that needs to be measured
- it ends at the earlier of 1 year from acqusition and when all the information needed is received
- any information received of conditions at existed at acquisition during the measurement period must be adjusted retrospectively
- all the other revisions must be treated prospectively - change in estimate
- does it go through profit and loss?
Why is it important to determine what is part of a business combination?
pre-existing relationships or other arrangements must be accounted for separately from the business combination
How do we account for the costs incurred in order to effect the business combination?
They should be expensed except for the costs of issuing any debt or equity, then we apply IAS 32
What is important to remember about a business combination that is a piecemeal acquisition?
the previously held equity interest needs to be remeasured to FV and the gain or loss must go to P/L
