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Business Combinations N R Govindarajan FCA,AICWA,DISA,CISA CHARTERED ACCOUNTANT
AS 14 Amalgamation <ul><li>Applicable only to merger and amalgamations and NOT to Acquisitions </li></ul><ul><li>Provides ...
AS 14 VS ED (REVISED) <ul><li>Major Differences between the Exposure Draft of AS 14 (Revised 20XX), Business Combinations,...
Objective <ul><li>To establish: </li></ul><ul><li>Principles and requirements for how the  acquirer : </li></ul><ul><li>(a...
Core learning <ul><li>An acquirer of a business recognises the assets acquired and liabilities assumed at their  acquisiti...
Core learning <ul><li>Option to measure non controlling interest at  fair value </li></ul><ul><li>Acquisition related cost...
Core learning <ul><li>Reacquired rights recognised as  intangibles </li></ul><ul><li>Pre existing relationship  and its ac...
In applicable <ul><li>This IFRS does not apply to: </li></ul><ul><li>(a) the formation of a joint venture. </li></ul><ul><...
What is a Business Combination <ul><li>A transaction or other event in which an  acquirer  obtains  control  of one or mor...
What is business? <ul><li>An integrated set of activities and assets that is capable of : </li></ul><ul><li>1. Being condu...
Acquirer, acquiree, Control <ul><li>Acquiree:  The business or businesses that the  acquirer  obtains control of in a  bus...
Acquisition method <ul><li>Acquisition method requires: </li></ul><ul><li>(a) Identifying the acquirer; </li></ul><ul><li>...
How to identify the acquirer? <ul><li>In each BC one of the combining entities shall be identified as acquirer </li></ul><...
Acquirer <ul><li>One who obtains control of other combining entities </li></ul><ul><li>More than 50% of the voting power <...
Acquisition Date <ul><li>The date on which acquirer obtains control of the acquiree </li></ul><ul><li>It may be the date o...
Principle of Recognition and Measurement RECOGNITION  PRINCIPLE RECOGNITION  CONDITIONS CLASSIFICATION OR  DESIGNATION OF ...
Recognition Principle <ul><li>As of the acquisition date, the acquirer shall recognise, separately from goodwill: </li></u...
Conditions for recognition <ul><li>Identifiable assets acquired and liabilities assumed must meet the definitions of asset...
Classification <ul><li>At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired ...
Classification <ul><li>In some cases it  provides for different accounting depending on how an entity classifies or design...
Exceptions to classification <ul><li>There are two exceptions : </li></ul><ul><li>(a) Classification of a lease contract a...
Measurement Principle <ul><li>The acquirer shall measure the identifiable assets acquired and the liabilities assumed at t...
Exceptions to the recognition or measurement principles <ul><li>Limited exceptions are given to  recognition and measureme...
Exception to the recognition principle <ul><li>Contingent liabilities </li></ul><ul><li>The requirements in IAS 37 do not ...
Exceptions to both the recognition and measurement principles <ul><li>Income taxes – to be measured as per IAS 12 Income T...
Indemnification assets <ul><li>The seller in a business combination may contractually indemnify the acquirer for the outco...
Indemnification assets <ul><li>The acquirer shall recognise an indemnification asset at the same time that it recognises t...
Indemnification assets <ul><li>The indemnification asset shall be recognised and measured using assumptions consistent wit...
Exceptions to the measurement principle <ul><li>Reacquired rights </li></ul><ul><li>Share-based payment </li></ul><ul><li>...
Reacquired rights <ul><li>The acquirer shall measure the value of a reacquired right recognised as an intangible asset on ...
Share-based payment <ul><li>The acquirer shall measure a liability or an equity instrument related to the replacement of a...
Assets held for sale <ul><li>The acquirer shall measure an acquired non-current asset (or disposal group) that is classifi...
Goodwill Measurement <ul><li>The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a...
Bargain purchase <ul><li>Reverse the procedure applied for goodwill measurement </li></ul><ul><li>The acquirer shall recog...
Consideration transferred <ul><li>The consideration transferred in a business combination shall be measured at fair value ...
Contingent consideration <ul><li>The consideration the acquirer transfers in exchange for the acquiree includes any asset ...
Contingent consideration <ul><li>The acquirer shall classify an obligation to pay contingent consideration as a liability ...
Step Acquisition <ul><li>An acquirer sometimes obtains control of an acquiree in which it held an equity interest immediat...
Measurement <ul><li>The acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-da...
BC without transfer of consideration <ul><li>Classic situations: </li></ul><ul><li>(a) The acquiree repurchases a sufficie...
Measurement period <ul><li>Measurement period cannot exceed one year from the acquisition date </li></ul><ul><li>During su...
Measurement period <ul><li>The acquirer shall retrospectively adjust the provisional amounts recognised at the acquisition...
Pre existing relationships? <ul><li>There may be pre existing relationships before the negotiations for BC or they may ent...
Acquisition-related costs <ul><li>Costs the acquirer incurs to effect a business combination </li></ul><ul><li>It includes...
Subsequent measurement and accounting <ul><li>Generally. an acquirer shall subsequently measure and account for: </li></ul...
Guidance  <ul><li>However for four items IFRS3 provides guidance  </li></ul><ul><li>They are: </li></ul><ul><li>(a) reacqu...
Reacquired rights <ul><li>Initially recognised as an intangible asset which  shall be amortised over the remaining contrac...
Contingent liabilities <ul><li>After initial recognition and until the liability is settled, cancelled or expires, the acq...
Indemnification assets <ul><li>At the end of each subsequent reporting period, the acquirer shall measure an indemnificati...
Contingent consideration <ul><li>Changes in the fair value of contingent consideration that the acquirer recognises after ...
Contingent consideration <ul><li>The acquirer shall account for changes in the fair value of contingent consideration that...
Contingent consideration <ul><li>(b) Contingent consideration classified as an asset or a liability that: </li></ul><ul><l...
Disclosures <ul><li>The acquirer shall disclose information that enables users of its financial statements to evaluate the...
Disclosures <ul><li>The acquirer shall disclose information that enables users of its financial statements to evaluate : <...
EFFECTIVE DATE AND TRANSITION <ul><li>This IFRS shall be applied prospectively to business combinations for which the acqu...
IFRS 3 Vs IGAAP  <ul><li>Covers all business combinations  </li></ul><ul><li>Fair value  based acquisition accounting for ...
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Business combinations

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  1. 1. Business Combinations N R Govindarajan FCA,AICWA,DISA,CISA CHARTERED ACCOUNTANT
  2. 2. AS 14 Amalgamation <ul><li>Applicable only to merger and amalgamations and NOT to Acquisitions </li></ul><ul><li>Provides for : </li></ul><ul><li>Accounting for amalgamations </li></ul><ul><li>Accounting for goodwill or capital reserves </li></ul><ul><li>Two methods of accounting </li></ul><ul><li>All 5 Conditions to be satisfied for Merger </li></ul><ul><li>Accounting – Pooling of interest method </li></ul><ul><li>Accounting – Purchase method </li></ul>
  3. 3. AS 14 VS ED (REVISED) <ul><li>Major Differences between the Exposure Draft of AS 14 (Revised 20XX), Business Combinations, and existing AS 14, Accounting for Amalgamations </li></ul>
  4. 4. Objective <ul><li>To establish: </li></ul><ul><li>Principles and requirements for how the acquirer : </li></ul><ul><li>(a) recognises and measures in its FS the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree ; </li></ul><ul><li>(b) recognises and measures the goodwill acquired in the business combination or gain from a bargain purchase; and </li></ul><ul><li>(c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination </li></ul>
  5. 5. Core learning <ul><li>An acquirer of a business recognises the assets acquired and liabilities assumed at their acquisition-date fair values </li></ul><ul><li>Discloses information that enables users to evaluate the nature and financial effects of the acquisition . </li></ul>
  6. 6. Core learning <ul><li>Option to measure non controlling interest at fair value </li></ul><ul><li>Acquisition related costs are routed through P&L account </li></ul><ul><li>Step acquisition – remeasure at acquisition date fair value – recognise profit or loss </li></ul><ul><li>Contingent consideration measured at fair value on the acquisition date with subsequent changes recognised in P&L account </li></ul><ul><li>Contingent liabilities recognised at fair value </li></ul>
  7. 7. Core learning <ul><li>Reacquired rights recognised as intangibles </li></ul><ul><li>Pre existing relationship and its accounting </li></ul><ul><li>Indemnification assets being measured on the same lines as that of Liability </li></ul>
  8. 8. In applicable <ul><li>This IFRS does not apply to: </li></ul><ul><li>(a) the formation of a joint venture. </li></ul><ul><li>(b) the acquisition of an asset or a group of assets that does not constitute a business . </li></ul><ul><li>(c) a combination of entities or businesses under common control </li></ul>
  9. 9. What is a Business Combination <ul><li>A transaction or other event in which an acquirer obtains control of one or more businesses . </li></ul><ul><li>Transactions sometimes referred to as ‘true mergers’ or ‘mergers of equals’ are also business combinations as that term is used in this IFRS. ( ie; Combinations of entities of approximately equal size or those in which it is difficult to identify an acquirer .) </li></ul>
  10. 10. What is business? <ul><li>An integrated set of activities and assets that is capable of : </li></ul><ul><li>1. Being conducted and managed for the purpose of providing a return in the form of dividends, </li></ul><ul><li>2. Lower costs or other economic benefits directly to investors or other owners, members or participants </li></ul>
  11. 11. Acquirer, acquiree, Control <ul><li>Acquiree: The business or businesses that the acquirer obtains control of in a business combination . </li></ul><ul><li>Acquirer: The entity that obtains control of the acquiree . </li></ul><ul><li>Control: The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. </li></ul><ul><li>Acquisition date: The date on which acquirer obtains control of the acquiree. </li></ul>
  12. 12. Acquisition method <ul><li>Acquisition method requires: </li></ul><ul><li>(a) Identifying the acquirer; </li></ul><ul><li>(b) Determining the acquisition date ; </li></ul><ul><li>(c) Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; and </li></ul><ul><li>(d) Recognising and measuring goodwill or a gain from a bargain purchase. </li></ul>
  13. 13. How to identify the acquirer? <ul><li>In each BC one of the combining entities shall be identified as acquirer </li></ul><ul><li>Apply the guidance in IAS 27 Consolidated and Separate Financial Statements to identify the acquirer Paras 13 to 15. </li></ul><ul><li>If not possible Para B14 to B18 of IFRS 3 shall apply – Based on size, initiator, entity issuing the equity etc </li></ul>
  14. 14. Acquirer <ul><li>One who obtains control of other combining entities </li></ul><ul><li>More than 50% of the voting power </li></ul><ul><li>Less than 50% of the voting power?? </li></ul><ul><li>The existence and effect of potential voting rights that are currently exercisable or convertible </li></ul><ul><li>If exercised or converted, to give the entity voting power or reduce another party’s voting power over the financial and operating policies of another entity </li></ul>
  15. 15. Acquisition Date <ul><li>The date on which acquirer obtains control of the acquiree </li></ul><ul><li>It may be the date of: </li></ul><ul><li>Transfer of consideration and acquisition of assets and assumption of liabilities. This is known as “ closing date”. </li></ul><ul><li>It is also possible for the acquirer to obtain control on a date which is either earlier or later than the closing date by virtue of agreement </li></ul><ul><li>One has to consider all pertinent facts and circumstances to identify the acquisition date </li></ul>
  16. 16. Principle of Recognition and Measurement RECOGNITION PRINCIPLE RECOGNITION CONDITIONS CLASSIFICATION OR DESIGNATION OF ASSETS ACQUIRED AND LIABILITIES ASSUMED- EXCEPTIONS? RECOGNITION AND MEASUREMENT MEASUREMENT PRINCIPLE EXCEPTIONS TO THE RECOGNITION AND/OR MEASUREMENT PRINCIPLES
  17. 17. Recognition Principle <ul><li>As of the acquisition date, the acquirer shall recognise, separately from goodwill: </li></ul><ul><li>1.The identifiable assets acquired, </li></ul><ul><li>2.The liabilities assumed and </li></ul><ul><li>3.Any non-controlling interest in the acquiree. </li></ul><ul><li>Recognition of identifiable assets acquired and liabilities assumed is subject to the conditions specified in paragraphs 11 and 12. </li></ul>
  18. 18. Conditions for recognition <ul><li>Identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities as per “Frame Work” </li></ul><ul><li>The identifiable assets acquired and liabilities assumed must be part of what the acquirer and the acquiree exchanged in the business combination transaction rather than the result of separate transactions. </li></ul><ul><li>More guidance is available in Para 51 – 53 </li></ul><ul><li>CASE STUDY </li></ul>
  19. 19. Classification <ul><li>At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired and liabilities assumed as necessary to apply other IFRS subsequently. </li></ul><ul><li>The acquirer shall make those classifications or designations on the basis of : </li></ul><ul><li>1. The contractual terms, economic conditions, </li></ul><ul><li>2. Its operating or accounting policies and </li></ul><ul><li>3. Other pertinent conditions as they exist at the acquisition date. </li></ul>
  20. 20. Classification <ul><li>In some cases it provides for different accounting depending on how an entity classifies or designates a particular asset or liability Eg:Financial Assets/liabilities as per IAS 39 </li></ul>
  21. 21. Exceptions to classification <ul><li>There are two exceptions : </li></ul><ul><li>(a) Classification of a lease contract as either an operating lease or a finance lease in accordance with IAS 17 Leases ; and </li></ul><ul><li>(b) Classification of a contract as an insurance contract in accordance with IFRS 4 Insurance Contracts . </li></ul><ul><li>The acquirer shall classify those contracts on the basis of the contractual terms and other factors at the inception of the contract or if modification is done on that date </li></ul>
  22. 22. Measurement Principle <ul><li>The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values . </li></ul><ul><li>The acquirer shall measure any non-controlling interest in the acquiree either at fair value or at its proportionate share of the acquiree’s identifiable net assets. CASE STUDY </li></ul><ul><li>Further guidance on measurement is available in Para B 41 – B 45 </li></ul><ul><li>Exceptions to the measurement principle is given in Para 24 to Para 31 </li></ul>
  23. 23. Exceptions to the recognition or measurement principles <ul><li>Limited exceptions are given to recognition and measurement principles. </li></ul><ul><li>Paras 22–31 specify exceptions and the nature of those exceptions. </li></ul><ul><li>The acquirer shall account for those items by applying the requirements in paragraphs 22–31, which will result in some items being: </li></ul><ul><li>(a) recognised either by applying recognition conditions in addition to those in paragraphs 11 and 12 or by applying the requirements of other IFRSs, with results that differ from applying the recognition principle and conditions. </li></ul><ul><li>(b) measured at an amount other than their acquisition-date fair values. </li></ul>
  24. 24. Exception to the recognition principle <ul><li>Contingent liabilities </li></ul><ul><li>The requirements in IAS 37 do not apply in determining which contingent liabilities to recognise as of the acquisition date. </li></ul><ul><li>The acquirer shall recognise as of the acquisition date a contingent liability assumed in a business combination if it is a present obligation that arises from past events and its fair value can be measured reliably. </li></ul><ul><li>Even though there is no probable outflow of resources embodying economic benefits will be required to settle the obligation </li></ul>
  25. 25. Exceptions to both the recognition and measurement principles <ul><li>Income taxes – to be measured as per IAS 12 Income Taxes </li></ul><ul><li>Employee benefits – to be measured in accordance with IAS 19 Employee Benefits </li></ul>
  26. 26. Indemnification assets <ul><li>The seller in a business combination may contractually indemnify the acquirer for the outcome of a contingency or uncertainty related to all or part of a specific asset or liability. </li></ul><ul><li>The seller may indemnify the acquirer against losses above a specified amount on a liability arising from a particular contingency; </li></ul><ul><li>The seller will guarantee that the acquirer’s liability will not exceed a specified amount. </li></ul><ul><li>In the above cases the acquirer obtains an indemnification asset </li></ul>
  27. 27. Indemnification assets <ul><li>The acquirer shall recognise an indemnification asset at the same time that it recognises the indemnified item measured on the same basis as the indemnified item, subject to the need for a valuation allowance for uncollectible amounts. </li></ul><ul><li>Examples: </li></ul><ul><li>A contingent liability that is not recognised at the acquisition date because its fair value is not reliably measurable at that date </li></ul><ul><li>An employee benefit, that is measured on a basis other than acquisition date fair value. </li></ul>
  28. 28. Indemnification assets <ul><li>The indemnification asset shall be recognised and measured using assumptions consistent with those used to measure the indemnified item subject to, </li></ul><ul><li>Management’s assessment of the collectibility of the indemnification asset and any contractual limitations on the indemnified amount </li></ul>
  29. 29. Exceptions to the measurement principle <ul><li>Reacquired rights </li></ul><ul><li>Share-based payment </li></ul><ul><li>Assets held for sale </li></ul>
  30. 30. Reacquired rights <ul><li>The acquirer shall measure the value of a reacquired right recognised as an intangible asset on the basis of the remaining contractual term </li></ul><ul><li>This right would be amortised over the remaining contract period </li></ul><ul><li>Eg: franchise right, trade name, license etc </li></ul><ul><li>The acquiree might have recognised it as intangible asset. </li></ul>
  31. 31. Share-based payment <ul><li>The acquirer shall measure a liability or an equity instrument related to the replacement of an acquiree’s share-based payment awards with share-based payment awards of the acquirer in accordance with the method in IFRS 2 Share-based Payment . </li></ul>
  32. 32. Assets held for sale <ul><li>The acquirer shall measure an acquired non-current asset (or disposal group) that is classified as held for sale at the acquisition date in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations at fair value less costs to sell </li></ul>
  33. 33. Goodwill Measurement <ul><li>The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b) </li></ul><ul><li>(a) the aggregate of: </li></ul><ul><li>(i) the consideration transferred based on acquisition-date fair value </li></ul><ul><li>(ii) the amount of any non-controlling interest in the acquiree </li></ul><ul><li>(iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree. </li></ul><ul><li>(b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this IFRS </li></ul>
  34. 34. Bargain purchase <ul><li>Reverse the procedure applied for goodwill measurement </li></ul><ul><li>The acquirer shall recognise the resulting gain in profit or loss on the acquisition date. </li></ul><ul><li>Review before assessing gains </li></ul><ul><li>CASE STUDY </li></ul>
  35. 35. Consideration transferred <ul><li>The consideration transferred in a business combination shall be measured at fair value </li></ul><ul><li>It shall be calculated as the sum of : </li></ul><ul><li>1.The acquisition-date fair values of the assets transferred by the acquirer, </li></ul><ul><li>2. The liabilities incurred by the acquirer to former owners of the acquiree and </li></ul><ul><li>3. The equity interests issued by the acquirer. </li></ul>
  36. 36. Contingent consideration <ul><li>The consideration the acquirer transfers in exchange for the acquiree includes any asset or liability resulting from a contingent consideration arrangement </li></ul><ul><li>The acquirer shall recognise the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree </li></ul>
  37. 37. Contingent consideration <ul><li>The acquirer shall classify an obligation to pay contingent consideration as a liability or </li></ul><ul><li>As equity on the basis of the definitions of an equity instrument and a financial liability as per IAS 32 Financial Instruments: Presentation , or other applicable IFRSs </li></ul><ul><li>CASE STUDY </li></ul>
  38. 38. Step Acquisition <ul><li>An acquirer sometimes obtains control of an acquiree in which it held an equity interest immediately before the acquisition date. </li></ul><ul><li>On 31 December 2009, Entity X Ltd holds a 35 per cent non-controlling equity interest in Entity Y </li></ul><ul><li>On that date, Entity X purchases an additional 40 per cent interest in Entity Y, which gives it control of EntityY. </li></ul><ul><li>IFRS3 refers to such a transaction as a business combination achieved in stages, also called step acquisition. </li></ul><ul><li>CASE STUDY </li></ul>
  39. 39. Measurement <ul><li>The acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value </li></ul><ul><li>Recognise the resulting gain or loss, if any, in P&L account </li></ul>
  40. 40. BC without transfer of consideration <ul><li>Classic situations: </li></ul><ul><li>(a) The acquiree repurchases a sufficient number of its own shares for an existing investor (the acquirer) to obtain control. </li></ul><ul><li>(b) Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the acquirer held the majority voting rights. </li></ul><ul><li>(c) The acquirer and acquiree agree to combine their businesses by contract alone. </li></ul><ul><li>The acquirer in such cases transfers no consideration in exchange for control of an acquiree and holds no equity interests in the acquiree, either on the acquisition date or previously. </li></ul>
  41. 41. Measurement period <ul><li>Measurement period cannot exceed one year from the acquisition date </li></ul><ul><li>During such period the acquirer collects all facts and circumstances those existed on the acquistion date </li></ul><ul><li>If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, </li></ul><ul><li>The acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete </li></ul>
  42. 42. Measurement period <ul><li>The acquirer shall retrospectively adjust the provisional amounts recognised at the acquisition date </li></ul><ul><li>This is to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, </li></ul><ul><li>If known, it would have affected the measurement of the amounts recognised as of that date </li></ul><ul><li>The measurement period ends as soon as the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable </li></ul><ul><li>CASE STUDY </li></ul>
  43. 43. Pre existing relationships? <ul><li>There may be pre existing relationships before the negotiations for BC or they may enter into an arrangement during the negotiations that is separate from the business combination. </li></ul><ul><li>In such cases the acquirer shall identify any amounts that are not part of what the acquirer and the acquiree exchanged in the business combination </li></ul><ul><li>Separate transactions shall be accounted for in accordance with the relevant IFRSs. </li></ul>
  44. 44. Acquisition-related costs <ul><li>Costs the acquirer incurs to effect a business combination </li></ul><ul><li>It includes: </li></ul><ul><li>Finder’s fees; advisory, legal, accounting, valuation and other professional or consulting fees </li></ul><ul><li>General administrative costs, including the costs of maintaining an internal acquisitions department and </li></ul><ul><li>These are to be expensed off </li></ul><ul><li>Costs of registering and issuing debt and equity securities to be treated in accordance with IAS 32 and IAS 39. </li></ul>
  45. 45. Subsequent measurement and accounting <ul><li>Generally. an acquirer shall subsequently measure and account for: </li></ul><ul><li>1. Assets acquired, </li></ul><ul><li>2. Liabilities assumed or incurred </li></ul><ul><li>3. Equity instruments issued in a business combination in accordance with other applicable IFRSs. </li></ul>
  46. 46. Guidance <ul><li>However for four items IFRS3 provides guidance </li></ul><ul><li>They are: </li></ul><ul><li>(a) reacquired rights; </li></ul><ul><li>(b) contingent liabilities recognised as of the acquisition date; </li></ul><ul><li>(c) indemnification assets; and </li></ul><ul><li>(d) contingent consideration </li></ul>
  47. 47. Reacquired rights <ul><li>Initially recognised as an intangible asset which shall be amortised over the remaining contractual period of the contract in which the right was granted </li></ul><ul><li>An acquirer that subsequently sells a reacquired right to a third party shall include the carrying amount of the intangible asset in determining the gain or loss on the sale. </li></ul>
  48. 48. Contingent liabilities <ul><li>After initial recognition and until the liability is settled, cancelled or expires, the acquirer shall measure a contingent liability recognised in a business combination at the higher of: </li></ul><ul><li>(a) the amount that would be recognised in accordance with IAS 37; and </li></ul><ul><li>(b) the amount initially recognised less, if appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue . </li></ul><ul><li>This requirement does not apply to contracts accounted for in accordance with IAS 39. </li></ul>
  49. 49. Indemnification assets <ul><li>At the end of each subsequent reporting period, the acquirer shall measure an indemnification asset that was recognised at the acquisition date on the same basis as </li></ul><ul><li>the indemnified liability or asset, subject to any contractual limitations on its amount </li></ul><ul><li>For an indemnification asset that is not subsequently measured at its fair value,management’s assessment of the collectibility of the indemnification asset. </li></ul><ul><li>The acquirer shall derecognise the indemnification asset only when it collects the asset, sells it or otherwise loses the right to it. </li></ul>
  50. 50. Contingent consideration <ul><li>Changes in the fair value of contingent consideration that the acquirer recognises after the acquisition date may be as a result of additional information </li></ul><ul><li>Such changes are measurement period adjustments </li></ul><ul><li>However, changes resulting from events after the acquisition date such as meeting an earnings target etc, are not measurement period adjustments </li></ul>
  51. 51. Contingent consideration <ul><li>The acquirer shall account for changes in the fair value of contingent consideration that are not measurement period adjustments as follows: </li></ul><ul><li>(a) Contingent consideration classified as equity shall not be remeasured and its subsequent settlement shall be accounted for within equity. </li></ul>
  52. 52. Contingent consideration <ul><li>(b) Contingent consideration classified as an asset or a liability that: </li></ul><ul><li>(i) Is a financial instrument and is within the scope of IFRS 9 or IAS 39 shall be measured at fair value, with any resulting gain or loss recognised either in profit or loss or in other comprehensive income in accordance with IFRS 9 or IAS 39 as applicable. </li></ul><ul><li>(ii) Is not within the scope of IFRS 9 or IAS 39 shall be accounted for in accordance with IAS 37 or other IFRSs as appropriate. </li></ul>
  53. 53. Disclosures <ul><li>The acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of a business combination that occurs either: </li></ul><ul><li>(a) during the current reporting period; or </li></ul><ul><li>(b) after the end of the reporting period but before the financial statements are authorised for issue. (Para B64—B66.) </li></ul>
  54. 54. Disclosures <ul><li>The acquirer shall disclose information that enables users of its financial statements to evaluate : </li></ul><ul><li>The financial effects of adjustments recognised in the current reporting period that relate to business combinations that occurred in the period or previous reporting periods (Para B67) </li></ul>
  55. 55. EFFECTIVE DATE AND TRANSITION <ul><li>This IFRS shall be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. </li></ul><ul><li>Earlier application is permitted. However, this IFRS shall be applied only at the beginning of an annual reporting period that begins on or after 30 June 2007. </li></ul><ul><li>If an entity applies this IFRS before 1 July 2009, it shall disclose that fact and apply IAS 27 (as amended in 2008) at the same time. </li></ul>
  56. 56. IFRS 3 Vs IGAAP <ul><li>Covers all business combinations </li></ul><ul><li>Fair value based acquisition accounting for business combination transactions; </li></ul><ul><li>Identification and segregation of intangible assets from goodwill on acquisition; </li></ul><ul><li>Differentiates purchase consideration of a business combination from the assets / liabilities arising from pre-existed business relationship or payment for future employment; </li></ul><ul><li>Negative goodwill adjusted in P&L account </li></ul><ul><li>Only one method of accounting – acquistion method - pooling of interest prohibited </li></ul><ul><li>Valuation of contingent liabilities </li></ul><ul><li>Goodwill amortisation – prohibited but tested for impairment </li></ul><ul><li>Only Amalgamation cases are covered in Indian GAAP </li></ul><ul><li>Negative goodwill adjusted in capital reserves </li></ul><ul><li>Two methods of accounting </li></ul><ul><li>Contingent liabilities are ignored </li></ul><ul><li>Goodwill amortised over 5 years </li></ul>
  57. 57. THANK YOU [email_address]
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