This document discusses key concepts related to business combinations, including defining a business combination, applying the acquisition method, determining goodwill, assessing goodwill impairment, and identifying the acquirer. It provides learning objectives and definitions from IFRS 3 and ASPE related to business combinations. Examples are provided to illustrate accounting for asset acquisitions, share acquisitions, and amalgamations. The calculation and subsequent accounting for goodwill and non-controlling interests are also summarized.
2. Learning Objectives
• Define a business combination
• Apply the acquisition method
• Determine Goodwill
• Related Goodwill issues; Goodwill impairment
and the impact of Goodwill on the Calculation
of the Non Controlling Interest
• Determination of Acquirer and acquisition
date
3. Business Combinations
Definitions
• IFRS 3 at Appendix A defines a business combination as
“a transaction or other event in which an acquirer
obtains control over one or more businesses “including
transactions sometimes referred to as mergers of
equals
• 1582.03(e) a business combination is a transaction or
other event in which an acquirer obtains control of one
or more businesses. Transactions sometimes referred
to as “true mergers” or “mergers of equals” are also
business combinations as that term is used in this
section.
5. Assets
• The acquirer would record the assets in its
books using the purchase price i.e. fair market
value at the date of acquisition. If debt is
acquired, the acquirer would record the net
present value of the future cash flows related
to that debt as a liability
6. Shares
• Acquire shares. There is a need to carefully
consider the nature of the investment and the
underlying intent of the acquirer. The
combination of intent and structure will
determine how to account for the
combination.
7. IFRS 3
• Must use acquisition method
• Identify and acquirer
• Acquisition date is the day the acquirer
obtains control of the acquiree
• Need to measure the fair value of the acquiree
as a whole at the acquisition date
• Measure identifiable assets acquired and
liabilities assumed at fair value
8. IFRS 3
• Goodwill is reported separately from net
assets
• NCI has two valuation options
• 1) Fair value of shares owned
• 2) Proportionate share of identifiable net
assets
9. ASPE
Section 1582
• ¨ An entity shall account for each business
combination by applying the acquisition method.
• Applying the acquisition method requires:
• (a) identifying the acquirer;
• (b) determining the acquisition date;
• (c) recognizing and measuring the identifiable
assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree; and
• (d) recognizing and measuring goodwill or a gain
from a bargain purchase
10. ASPE
Section 1582
• The acquirer shall measure the identifiable assets
acquired and the liabilities assumed at their
acquisition-date fair values.
• A non-controlling interest is the equity in a
subsidiary not attributable, directly or indirectly,
to a parent.
• For each business combination, the acquirer shall
measure any non-controlling interest in the
acquiree either at fair value or at the non-
controlling interest's proportionate share of the
acquiree's identifiable net assets.
11. Business Combination
Example Data
• P Co S Co
• Current assets 1,400 800
• Non CA – net 2,200 1,500
• Current Liabilities 800 400
• RE 1,800 1,020
• CS 1,000 880
12. Business Combinations
Example Transactions
• Fair value of S Co NCA 2,000
• Transaction 1
• - purchase net assets of S Co for 2,400 by
issue 500 in new shares and long term debt of
1,900
• Transaction 2
• - purchase 100% of shares of S co for 2,600.
700 in new shares and 1,900 in long term debt
13. Business Combinations
Transaction 1
• Assets acquired for share and debt consideration
• CA 1,400+800 = 2,200
• NCA 2,200+800+500 = 3,500
• 5,700
• CL 800+ 400 = 1,200
• LTD +1,900 = 1,900
• 3,100
• C/S = 1,800
• RE = 1,800
• 3,600
• 5,700
14. Business Combinations
Transaction 2
• Analysis of transaction
• Investment proceeds 700+1900 = 2,600
• Net Book value of S Co 1,020+880 = 1,900
• Acquisition differential 700
• Fair value adjustments
• NCA 2,000 -1,500 500
• Goodwill 200
15. Business Combinations
Transaction 2
• Journal entries
• Investment 2,600
• Long term debt 1,900
• Share capital 700
• To record investment
16. Business Combinations
Transaction 2
• Journal entry
• CS S co 880
• Re S co 1,020
• NCA fair value change 500
• Goodwill 200
• Investment 2,600
• To record elimination entry
19. Business Combinations
Reporting Method
• 1582.04 An entity shall determine whether a
transaction or other event is a business
combination by applying the definition in this
section, which requires that the assets and
liabilities assumed constitute a business. If the
assets acquired are not a business, the reporting
entity shall account for the transaction or other
event as an asset acquisition
• 1582.05 An entity shall account for each business
combination by applying the acquisition method
20. Business Combinations
Acquisition Date - Asset Recognition
• 1582.11 As at the acquisition date, the acquirer
shall recognize, separately from goodwill, the
indefinable assets acquired, the liabilities
assumed and any non-controlling interest in the
acquire
• Intangible assets must be recognized if they can
be separately identified
• Assets and liabilities are to be classified
• 1582.19 The acquirer shall measure the
identifiable assets acquired and the liabilities
assumed at their acquisition-date fair values
21. Business Combinations
Acquirer IFRS - 3
acquiree The business or businesses that the
acquirer obtains control of in a business
combination.
acquirer The entity that obtains control of the
acquiree.
acquisition date The date on which the acquirer obtains
control of the acquiree.
22. Business Combination
Acquirer IFRS - 3
• The Acquirer is the entity that obtains control of the
acquiree. If a business combination has occurred but
applying the guidance in IAS 27 does not clearly
indicate which of the combining entities is the acquirer,
the factors in paragraphs B14–B18 shall be considered
in making that determination.
• B14 In a business combination effected primarily by
transferring cash or other assets or by incurring
liabilities, the acquirer is usually the entity that
transfers the cash or other assets or incurs the
liabilities.
23. Business Combinations
Goodwill Defined
• 3604.08(g) defines it as “an asset representing the
future economic benefits arising from other assets
acquired in a business combination that are not
individually identified and separately recognized.
• IFRS 3 An asset representing the future economic
benefits arising from other assets acquired in a
business combination that are not individually
identified and separately recognised.
• Goodwill is largely the amount paid for access to
returns on investment that exceed portfolio investment
rates.
24. Business Combinations
Goodwill - Calculated
• Goodwill – 1582.34
• Goodwill is calculated as the excess of A over B
A
• The Aggregate of:
• The consideration transferred measured in accordance with this section,
which generally requires acquisition-date fair values (1582.39)
• The amount of any non-controlling interest in the acquire ( measured at
fair value) and
• In a business acquired in stages, the acquisition date fair value of the
acquirers previously held equity interest in the acquire and
B
• The net of the acquisition-date amounts of the identifiable assets
acquired and the liabilities assumed measured in accordance with this
section(1582.19)
25. IFRS 3
Goodwill
• The acquirer shall recognise goodwill as of the acquisition date
measured as the excess of (a) over (b) below:
• (a) the aggregate of:
• (i) the consideration transferred measured in accordance with this
IFRS, which generally requires acquisition-date fair value (see
paragraph 37);
• (ii) the amount of any non-controlling interest in the acquiree
measured in accordance with this IFRS; and
• (iii) in a business combination achieved in stages (see paragraphs 41
and 42), the acquisition-date fair value of the acquirer's previously
held equity interest in the acquiree.
• (b) the net of the acquisition-date amounts of the identifiable
assets acquired and the liabilities assumed measured in accordance
with this IFRS.
26. Business Combinations
Amalgamations
• In the basic form two companies combine to
form a new company, the old companies cease to
exist when the new one is formed
• Statutory amalgamations are those conducted
according to provincial and or federal legislation
• You do not typically get any fair value increases in
an amalgamation
• You can still identify an acquirer in an
amalgamation
27. Business Combination
Transaction 3
• Amalgamation of two co’s into Newco
• CA 1,400+800 = 2,200
• NCA 2,200+1,500 = 3,700
• 5,900
• CL 800+400 = 1,200
• RE 1,800+1,020 = 2,820
• CS 1,000+ 880 = 1,880
• 5,900
29. Business Combinations
Non Controlling Interest
• The Non Controlling Interest ( NCI ) is that portion of
the Investee not owned by the controlling interest
• The NCI share of net equity is a separate item on the
balance sheet of the Consolidated Entity and it is
disclosed as a separate line item in shareholders equity
• NCI is a calculated amount and only appears in the
consolidated Financial statements
• The consolidated Income Statement measures the NCI
allocation as a deduction from Consolidated Net
Income
30. Goodwill
Measurement Implications
• Once recorded it is no longer amortized
• Impairment testing is required
31. Goodwill Impairment
• Goodwill is assigned to a Cash Generating Unit
- CGU
• A CGU that has goodwill allocated to it is
tested annually for impairment.
• The recoverable amount of the CGU is
compared with its carrying amount, including
goodwill, to determine if the unit and its
goodwill are impaired
32. Recognizing Impairment
• When the recoverable amount is less than the carrying
amount, an impairment loss is recognized
• The loss is assigned first to the carrying amount of the
goodwill and then any excess is allocated to each asset
in the CGU on the basis of its carrying amount
• No asset is written down below its carrying amount
• The reduction in each asset is it impairment loss.
• Losses are recognized in the income statement
• Impairment losses for Goodwill are not reversible
33. Plant Property & Equipment
• Property, Plant and Equipment impairment
losses are recognized using the revaluation
model and are treated as revaluation write
downs
• Impairment losses on other assets can be
reversed, limited by the original carrying
amount of the asset.
• New rates of amortization and depreciation
need to be determined
34. Business Combinations
Summary – Key steps
• Key step is the determination of FVNIA
• Starting point is the book value of NIA
• Book values are adjusted to Fair values
• Identify those fair value increments subject to
amortization and the related periods over
which to amortize the fair value changes
• Book value of NIA = Stated equity ( CS/RE)
