Lecture 7A - Business Combination Flashcards
IFRS 10 - Control
The Four Scenarios of Control
- Control –> Consolidation (IFRS 3, 10)
- Joint Control –> Pro rata (IFRS 11)
- Significant Influence –> Equity Method (IFRS 28)
- No control or significant influence –> FV (IFRS 9)
IFRS 10 - Control
Extent of Influence by %
IFRS 10 - Control
Definition of Control
IFRS 10 - Control
Power Definition
An investor has power over an investee when he:
- has existing rights
- that give him the ability
- to direct
- the relevant activities of the investee
IFRS 10 - Control
Relevant Activities
= the activities of the investee that significantly affect the investee’s return
In many cases, a range of operating and financing activities significantly affects the returns
e.g. selling and purchasing, receivables management, R&D, asset management, budget decisions, appointment key management personnel
IFRS 10 - Control
Substantive Rights
Power is given by athe ability to exercise substantive rights
- exercisasble when decisions about the relvant activities are made
- holder needs to have the practical ability to exercise those rights
Factors to consider:
- Barriers to prevent exercise?
- Mechanism in place in case of disagreements?
- Holding party benefits from their exercise? (rights are in the money)
IFRS 10 - Control
Protective Rights
Protective rights are NOT relevant for the assessment of power
- they cannot give the holder power or prevent other from having power
- they are related to fundamental changes to the activities of an investee, or are right that apply in exceptional ciicumstances
IFRS 10 - Control
The Control Model - 5 Steps
- Identification of the potential subsidiary (entity or silo)
- Identification of the relvant activities
- Analysis, how decisions abour RA are made
- Assessment whether the investor has power over the RA
- Assessment whether the investor is exposed to variable return from its investment
- (4-5) assessemnt of linkafe between power and variable returns
Definition of a Business
Definition and Formula
= a business is an integrated set of activities and assets that is capable of being conducted and managed to provide G&S to customers for the purpose of trading a return (dividends, lower costs, or other conomic benefits) directly to investors and other owners, members, or participants
IFRS 10 - Control
Assessment based on 2 tests
Acquisition Model
7 Steps
- Identify the Acquirer
- Determine the date of acquisition
- Identify and measure the consideration transferred
- Recognition and measurment of the identifiable net assets
- Measurement of NCI
- Recognition and measurment of goowill
- Recognize any measurement period adjustement
Acquisition Model
Step 1: Identifying the Acquirer
Acquisition Model
Step 2: Determine the date of acquisition
Acquisition Model
Step 3: Identify and Measure the Consideration transferred
Acquisition Model
Step 4: Recognition and Measurment of the Identifiable Net Assets acquired
Acquisition Model
Recognition of Intangible assets not previously recognised
Measurement Principles
Measurment
Acquisition Model
Measurement of FV
Acquisition Model
Balance Sheet Post-PPA
Acquisition Model
Step 5: Measurement of NCI
Non-controlling interests (NCI) are measured…
- at FV (full GW method) (GW gain or bargain includes a portion attributatble to NCI)
- at the holder’s proportionate interest in the recognized amount of the identifiable ent assets of the acquiree (partial GW method) (GW recognized, gain or bargain, related only to the controlling interest acquired –> NCI and GW are lower)
Acquisition Model
Step 6: Recognition and Measurement of GW
Step 7: Measurement period adjustments
The measurement period is the period after the acquisition date during which the acquirer may adjust the provisional amounts recognised for a business combination
- When new info obtained post acquisition date
- eds when the required info has been obtained or is no longer available
- Cannot be longer than 1 year post-acquisiton
If the acquisition accounting is not complete by the reporting date, disclose facts and provisional amounts, which are to be adjusted retrospectively. After the measurment period ends, the accounting for a business combiantion can only be revised to correct an error.
